Unclaimed Property: The Stink of Stale Checks
October 17, 2013
Many companies have their share of outstanding checks cluttering their bank reconciliations, and contractors are by no means different. Reasons can range from field laborers not traveling to headquarters to pick up a final paycheck, to vendors not following up on lost checks. Regardless of the reason, stale checks should be monitored to avoid penalties associated with unclaimed property laws.
Given the many moving parts, it is understandable that many small-to-large contractors do not have a grasp of unclaimed property laws. What state does the contractor report in? What are the deadlines for filing? When is a check considered unclaimed property? What does the contractor need to file?
Luckily, determining the state where the contractor is required to file an unclaimed property report is substantially uniform among Washington, D.C., Maryland and Virginia. All three jurisdictions use the last known address as the determining factor. For instance, if a Maryland corporation had amounts payable to a resident or business with a last known address in D.C., then the report would be filed in D.C. Additionally, all three jurisdictions use the same reporting period (July 1 – June 30), however, the filing deadlines vary. Maryland has a filing deadline of October 31, while D.C. and Virginia’s deadline is one day later on November 1.
The first step in addressing unclaimed property concerns is determining when a contractor has an outstanding check that’s considered abandoned. The following is a summary, by jurisdiction, of when checks are considered abandoned:
- Washington, D.C. – One year from the date the payroll/vendor check became payable.
- Maryland – Three years from the date the payroll/vendor check became payable.
- Virginia – One year from the date payable for payroll checks and five years from the date payable for vendor checks.
Once a contractor has determined that an outstanding check has been abandoned, the contractor must make an effort to contact the owner of the check by sending a written notice to the last known address of the owner. The following are the due dates, by jurisdiction, of the written notices:
- Washington, D.C. and Virginia: At least 60 days before filing an unclaimed property report, but no earlier than the June 30 cutoff date. For example, if a contractor sent their unclaimed property report to the jurisdiction on October 1, they must send the letter to the owner no later than August 2, and no earlier than June 30.
- Maryland: At least 30 days before filing an unclaimed property report, but no more than 120 days prior to filing the unclaimed property report. Assuming the contractor sent their unclaimed property report to Maryland on October 1, they must send the letter to the owner no later than September 1, and no earlier than June 3.
Assuming that the contractor does not receive correspondence from the check owner, the contractor must send an unclaimed property report to the respective jurisdiction by the applicable due date, along with a remittance in an amount equal to the outstanding check. The unclaimed property then becomes the responsibility of the jurisdiction, which holds the funds until the rightful owner makes a claim.
Once the above steps have been taken, the contractor can avoid the associated penalties with failure to comply. However, if the contractor does not take these measures, the exposure to penalties, by jurisdiction, is as follows:
- Interest of 1 ½% per month, or fraction of a month, on the value of the unclaimed amount from the date the property should have been turned over to D.C.
- $200 for each day the unclaimed property report, or payment, is withheld from D.C., up to a maximum of $10,000. Assuming non-compliance is willful, the fine increases to $1,000 for each day the report, or payment, is withheld, up to a maximum of $25,000, plus 25% of the value of the unclaimed property that should’ve been paid or delivered.
- Penalty of 15% of the value of the abandoned property for failure to pay, or deliver abandoned property to the state. Assuming non-compliance with this requirement is willful, the fine increases to no less than $500, or no more than $5,000, or imprisonment of not more than six months.
- Any person who willfully fails to render any report required is subject to a fine of $100 per day the report is withheld, but not more than $5,000.
- Interest, based on Virginia’s rate for delinquent taxes, on the value of the unclaimed amount from the date the property should have been delivered to Virginia. As of 2013, the interest rate equals the sum of the federal short-term rate plus 3%.
- If the contractor fails to attempt contact with the owner prior to filing the unclaimed property report, the penalty will max out at $50 per account where contact was not attempted.
- $100 for each day the unclaimed property report, or payment, is withheld from Virginia, up to a maximum of the lesser of $10,000 or 25% of the value of the abandoned property. Assuming non-compliance is willful, the penalty increases to $1,000 per day, up to a maximum of the lesser of $50,000 or 100% of the value of the abandoned property.
Old, outstanding checks are often times an afterthought given the more pressing accounting issues that CFOs and controllers handle. With all the steps that must be taken to comply with the various unclaimed property laws and regulations, it’s common for procrastination to take over. Creating a stale check policy and adhering to it will not only clean up the clutter on the bank reconciliation, it will also prevent the consequences associated with non-compliance. Given that stale checks are generally smaller in value, it becomes apparent that the exposure to penalties may not be worth the risk.
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