What the (bleep) does Escheat mean? (what you need to know about unclaimed property)

March 20, 2012

Escheat is defined as a state’s rights to claim the title for unclaimed property. Before you dismiss this as N/A for your organization, take a look at your outstanding check list on your bank reconciliation. How far back does it go? It’s not uncommon for organizations to keep checks as reconciling items that are more than a year old. (The record this auditor has witnessed was 1993). It’s not limited to outstanding checks but can include unclaimed benefits, customer over-payments, gift cards, and refunds due.

It isn’t as simple as reversing the entry or voiding the checks. This is money that doesn’t belong to you anymore. Just because someone else never cashed it, doesn’t make it yours again. It is worth investigating with vendors to determine if they received it, lost it, your account was properly credited, etc. There’s a chance that a check was duplicated in the system – that money is actually yours, unlike the checks that represent actual payments.

Why does this matter? Because states are paying attention to it now. With serious governmental budget slashing, alternative sources of revenue are being sought with few stones left unturned. The state of Delaware listed unclaimed property as its third largest revenue for the year. States are shortening their dormancy periods.

States determine unclaimed property through audits (the government kind, they aren’t as nice as we are). Those audits generally go back to a cut-off of 1981. Except California which reserves the right to investigate back to the date of formation of the organization. Most organizations aren’t even on the same financial systems (we hope), especially considering some of your accounting staff probably weren’t even born yet.

Each state has their own laws regarding unclaimed property with different dormancy periods, ranging from as much as 5 years to as little as none. The laws will vary depending on if the payment crossed state lines.

Do not assume that because you are a tax-exempt organization that you are exempt from escheat laws. Often referred to as a tax, it is actually a property rights law, not a tax, and non-profits are subject. This includes hospitals, schools, and churches.

Organizations should get proactive to avoid being hit with a state audit. Add a procedure to closing and have someone in charge of monitoring and researching stale checks and other unclaimed property. Look into the laws for your state and the definition of unclaimed property.

There are several organizations – Unclaimed Property Professionals Organization (UPPO), Council on State Taxation (COST) and the National Association of State Treasurers (NAST) – that offer seminars and provide periodic updates on unclaimed property developments.

(source: Thomson Reuters)

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