Nonprofit Accounting Basics

Unclaimed Property: Reporting What You Hold and Claiming What You Have Lost

Topics: 

As states continue to struggle through the current economic downturn, many are looking for ways to increase revenues. One way to do this without raising taxes is through unclaimed property collections. A number of states have increased the number of audits they perform in this area. As such, it is important for organizations to have a clear understanding of the issues surrounding unclaimed property taxes.

Unclaimed property is defined as an asset, either tangible or intangible, intangible, that is being held for a person or entity that cannot be found. Oftentimes, property becomes abandoned as a result of a change of address, a name change, or death of the owner. Generally, property is presumed to be abandoned if it is held or owing in the ordinary course of the holder’s business and has remained unclaimed by the owner or “inactive” for a specified period of time after it became payable or distributable. For example, in the District of Columbia that period of inactivity is 3 years. Reportable unclaimed property falls into more than 20 categories, the most common of which include outstanding checks, credits and security deposits, dormant bank accounts, gift certificates, and utility deposits.

As an organization, you are required by law to take certain steps if you hold property that is presumed to be abandoned. During the abandonment period, organizations are required to make a good faith effort to try and return the property to the rightful owner. As a matter of best practice, organizations should follow-up on outstanding checks and credits after six months rather than waiting for a year or more to do so. In addition, organizations should have policies and procedures in place to periodically measure the amount of their potential unclaimed property liability, document their findings, and record the liability on the books, if appropriate. The documentation of these adjustments should be kept in the organization’s accounting records in accordance with their record retention policies that are compatible with unclaimed property tax laws.

If the organization is unsuccessful in locating the rightful owner, then the property must be turned over to the state's abandoned-property division or unclaimed property office. Generally, the property is turned over to the state of the property owner's last known address. If the address is not known, it has to be turned over to the state in which the business holding the funds is incorporated.

Given the potential audit and tax assessment exposure, it is important for holders of unclaimed property to understand their responsibility to comply with their state’s unclaimed property laws which vary from state to state. In the District of Columbia, businesses must submit their report and remittance of abandoned property prior to November 1st of each year. The report should detail all items considered abandoned as of June 30th of the same year. Failure to comply with state statutes can result in audit assessments, interest accumulations, and in some states, financial penalties. Once you have reported and turned over the unclaimed property to the state, the state will then attempt to find the rightful owner.

The other side of the coin is that property belonging to your organization might be located in a state unclaimed property office and waiting to be claimed, such as a refund check, a security deposit from a previous landlord, or even a certificate of deposit. If you think there might be unclaimed property that belongs to your organization, call or write to the unclaimed property office in the state in which you do business. It is also a good idea to check with the state offices every few years to see if they are holding unclaimed property that belongs to your organization.