Unclaimed property refers to accounts and other intangible property held by corporations, financial institutions, and other entities (“holders”) that have gone dormant for a period of time. The unclaimed property laws are intended to protect the owners of the property. Common types of unclaimed property include bank accounts, uncashed dividend checks, customer deposits, accounts payable, credit balances, refund checks, and gift cards.

Most individuals view unclaimed property as a possible windfall. However, the opposite is the case for holders who are required to comply with state reporting policies and report unclaimed property on an annual basis. If a holder believes it is not holding unclaimed property, each state generally requires the holder to file a negative report.

Possible Liability due to Unclaimed Property

Failure to comply with a state’s unclaimed property reporting requirements may be revealed in an unclaimed property audit. Most commonly, however, a potential unclaimed property liability will arise during a due diligence examination during the sale of a business. In fact, a holder’s largest exposure for unclaimed property lies with the buyer of the holder’s business, rather than an audit by one or more states. Unclaimed property audit rates are low – even lower than the IRS audit rate, which is less than one-half of one percent. Most holders of unclaimed property will never be contacted by a state’s unclaimed property department. The real exposure arises when a holder is contemplating the sale of its business. Unclaimed property review has become routine in a buyer’s due diligence checklist. The buyer will engage unclaimed property professionals to review the books and records of the selling holder to determine the maximum unclaimed property exposure. Since the unclaimed property professionals and the buyer have a great incentive to maximize unclaimed property exposure, all subjective determinations will be resolved in the buyer’s favor.

For example, buyers will apply all penalties and interest utilizing a look back period that dates back to the selling holder’s year of incorporation. The buyer will then use the maximum exposure number to negotiate a lower purchase price of the selling holder’s business. If the unclaimed property exposure is large enough, the buyer may walk away from the purchase altogether.

Seek Assistance to Ensure Compliance

A company that may not be compliant with the unclaimed property reporting requirements in each state in which it does business should consider utilizing the voluntary disclosure programs of the states. Most voluntary disclosure agreements offer benefits such as limited look back periods and smaller penalties and interest. Many states, including Illinois, have a voluntary disclosure program for unclaimed property holders who have compliance issues from prior periods that they would like to rectify. Holders who obtain professional assistance have the opportunity to reconcile potential unclaimed property to further reduce exposure.

Many entities do not realize that what they hold is in fact unclaimed property, such as refunds and gift cards. If you would like more information or have any questions on the topic, please contact a tax attorney at Golan Christie Taglia.

* Nancy acknowledges the invaluable input and contribution to this article by Colin Walsh, a Senior Manager with Baker Tilly Virchow Krause, LLP in Chicago.