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Do State Unclaimed Property Reporting Rules Apply to Me? It’s Likely!

We've all heard stories of people who, through a simple internet search, have tracked down money and property they've long since forgotten. Unclaimed property has become a hot topic in taxation and it isn’t even a tax. Each state administers a program to track, report, and return unclaimed property. While your business may be able to use these programs to locate forgotten property, it is also responsible for identifying and remitting unclaimed property that comes into its possession.

What Is Unclaimed Property?

Unclaimed property is property that has not been claimed by an “owner” and is considered abandoned. Property is not considered to be unclaimed until its owner fails to claim it for a specified period of time, a dormancy period. After the dormancy period, the business is required to make one last attempt to return the property. If after this attempt, the property has still not been claimed, the property is turned over to the state of the last known address of the owner. If no address is known, the property is turned over to the state of the business’s incorporation/organization. 

Common forms of unclaimed property include uncashed payroll checks, credit balances, deposits, and gift cards. 

For example, a manufacturer stipulates that when a customer purchases $100,000 of its products, the customer earns a $5,000 credit. If the customer does not use the credit for the set dormancy period, the credit will be considered unclaimed property. If the business cannot track down the customer, the property will be turned over to the state of the customer’s last known address.  Note, there are no nexus rules, a business can be subject to unclaimed property rules of multiple states. 

What about gift cards? A retailer receives cash from a customer and issues a gift card in the same amount for the customer to give as a gift. If the gift card is not used during the set dormancy period in the customer’s state, the gift card will be considered unclaimed property. Unclaimed property reporting is not to be confused with the tax treatment of gift cards. 

Should I Be Concerned?

Every business is responsible for unclaimed property reporting. In many cases, unclaimed property will be minimal, but a policy should be in place to address this property when it comes up. In Illinois, as with a number of other states, a filing is required on an annual basis whether a business has unclaimed property or not. Not filing a required return can potentially lead to significant penalties and interest. 

States have begun to audit unclaimed property more heavily. These audits tend to last much longer than a typical state audit, and are generally not subject to a statute of limitations. If your business comes under audit, it could be responsible for remitting unclaimed property dating back to the mid 1980s, along with penalties and interest that can rival the amount of the unclaimed property. 

Businesses incorporated or organized under the laws of Delaware should pay special attention to unclaimed property. The state of Delaware has taken a hard stance on unclaimed property and has pursued its recovery aggressively. This has paid off for Delaware; about 12% of Delaware’s budget comes directly from unclaimed property. 

Illinois’s Treatment of Unclaimed Property

Illinois is known for fairly administering its unclaimed property program — at least compared to Delaware. Illinois’s program features a business-to-business exemption. Under this provision, no unclaimed property can arise from a transaction solely between businesses. This greatly reduces potential unclaimed property for business operation in the state. Illinois’s dormancy period is five years for most property and its annual filing is due on May 1. 

Illinois requires a business to take certain steps immediately before property will be considered unclaimed. A business must send a letter by first-class mail to the owner of property in the window of 60 to 120 days before the property will become unclaimed. No letter is required for property under $10; amounts under this threshold must still be remitted to the state. The letter must provide the owner steps that he or she may take to prevent the property from becoming unclaimed. 

States have been paying increasing attention to unclaimed property. While unclaimed property may be immaterial to your business operations, an understanding of proper reporting is still important. In most cases, action is required even if your business has no unclaimed property. 

For further information please contact Jason Parish at  jparish@BlackmanKallick.com 312-980-2959, or your Blackman Kallick representative. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.