Every state has an unclaimed property (UCP) law that requires businesses to regularly report their UCP holdings. Some states, including Illinois, even require “negative reporting” by businesses that believe they do not hold any UCP. Noncompliance can lead to costly state audits, and nearly every business is at risk.
For most businesses, the annual reporting deadline for Illinois is May 1, so you may not have much time to take the necessary steps to ensure compliance.
UCP Laws in a Nutshell
UCP generally is defined as property that the owner has not claimed for a specified “dormancy period” set by law. In Illinois, the dormancy period varies by property type. For most property, the dormancy period runs three years. A notable exception to this dormancy period is an employee paycheck, which has a dormancy period of only one year.
UCP can include:
- Uncashed checks;
- Refunds or credit balances;
- Stocks and securities;
- Unredeemed gift certificates, gift cards or stored value cards;
- Deposits (including, in Illinois, auto-renewing deposits); and
- Safe deposit box contents.
Under UCP laws, a business holding such property may be required to make an effort to contact the owner after the dormancy period expires to allow the owner a final opportunity to claim the property. Illinois law generally requires a business holding property with a value of at least $50 to notify the owner by first-class mail and/or email that the owner’s property may escheat to the state if the owner fails to contact the business within a specified number of days.
If the efforts by the business are unsuccessful, then the business must remit (or escheat) the property to the appropriate state. Unless otherwise specified by federal law, UCP generally is “sourced” to the owner’s last known address, meaning the holder must remit it to the state that corresponds with that address. If the address is unknown, the UCP is sourced to the holder’s state of incorporation.
Related Read: Unused Gift Cards: Windfall or Burden?
Reporting and Recordkeeping Requirements
UCP laws include stringent annual reporting requirements. In Illinois, the report should cover one year of account activity for three years prior to the last calendar year. That means the upcoming report due on May 1, 2023 should cover activity from January 1, 2019 through December 31, 2019.
UCP laws also include record retention requirements. Importantly, they generally do not track with standard practices for record retention. Many businesses, for example, retain records for six years in case of an IRS audit. But UCP laws require records related to the required annual UCP report to be kept for 10 to 15 years (10 years in Illinois). This translates to 13 to 18 years of records.
The potential price for not having complete records is high. States can “extrapolate” or estimate the amount of UCP that a business should have remitted for years lacking the requisite records. Illinois refers to the estimated amount as the extrapolation penalty.
A Wide Net
States have been aggressive about pursuing noncompliant businesses. Many rely on outside firms, paid on a contingency basis, to help identify noncompliant businesses and estimate UCP that should have been remitted. These firms often have contracts with multiple states. As such, if you land in the cross-hairs of one state, others are likely to follow.
Some states send so-called “self-audit” letters to businesses suspected of noncompliance. Such letters should not be ignored — in Illinois, you generally only have 15 days to respond. If you do, you will receive a self-exam questionnaire. A prompt response can preempt on an on-site audit, as well as penalties and interest.
California takes another approach. It requires companies to disclose on their annual income tax returns whether they have been complying with the state’s UCP laws. Other states require businesses that have not filed a verified report to disclose their policies and procedures related to UCP and explain why no report was filed.
Related Read: Is There Unclaimed Property with Your Name on It?
No business can afford to ignore the UCP laws. Those that are likely to be subject to reporting requirements should develop policies and procedures to achieve and maintain compliance with all of the applicable state mandates.
You should begin by identifying the different types of UCP your business could hold and the departments where they originate. From there, you can develop policies and procedures for UCP tracking, records retention, timely reporting and due diligence.