How to Handle Unclaimed Property

You may have payable bills (unclaimed checks) that you cannot send to a vendor, overpayments to a customer, unclaimed paychecks from an employee, or other properties that belong to someone else but which are in your business possession. Still, you have no idea how to get these properties to the person who owns them.

It is essential to note that individual states govern laws relating to unclaimed property (including paychecks). The regulations are those of the state in which the beneficiary is located, not those of the state in which the company is based.

If your business finds itself in a situation where you cannot find the owner of the unclaimed property, you need to do two things:

• Make every reasonable effort to find the recipient of the payment so that the money can be delivered.

• If you cannot locate the recipient within a reasonable time, you must report your non-payment to your state and remit the money to the state to be made available to the recipient later.

Suppose you paid an employee who left your company and did not cash his paycheck. You have the money in your company's payroll account, but remember that it does not belong to you. Unclaimed property is considered debt for accounting purposes; that is, a property that you own but do not own.

Your business has two responsibilities regarding unclaimed assets: (1) report and pay unclaimed assets in good condition, and (2) ensure that the company properly reflects the debt in its financial statements.

Unclaimed property and your business bookkeeping

For accounting purposes, when you get to the point where you need to report the unclaimed check to your state, consider voiding the check and depositing the amount in an escrow account.

This will help ensure that your funds are not accidentally spent. You must have already paid social charges for this amount. Please keep all records of this beneficiary or employee up to date and make sure that you continue to try to communicate with this person on a regular basis.

Declaration and paying to the state

The principle of escheat applies here. Escheat means "surrender" and is based on a common law doctrine that requires the return (surrender) of unclaimed property that does not belong to the person who owns it. The idea is that the property does not belong to you and that the state has more resources to find the natural or legal person who owns the property.

If no owner is found, the state retains its ownership. Property types that can be applied are checks (including salaries), blocked funds, customer overpayments, accounts receivable that cannot be paid to vendors, payroll checks, and commission checks.

State laws on unclaimed property 

All states have escheat laws that define time limits and procedures. State laws generally include the following steps:

• The state specifies a no-contact time period regarding the property.

• There is an annual period to try to locate owners by sending due diligence letters to the last known address. It is good practice to send these letters by registered mail or with a "tax receipt request" to keep track of attempts to contact the person or business.

• After this period in the year, you must file a report with the state and pay any amounts owed to owners you were unable to contact.

Unclaimed paychecks

Unclaimed paychecks are also subject to escheat laws as unclaimed property. The laws of the state in which the employee last worked apply. If you have a paycheck for a former employee or an employee that has not been claimed for a while, you must follow the same status reporting timeline as your other properties.

Accounting for unclaimed property

The accounting for unclaimed property varies depending on the likelihood of claiming the property. According to the Accounting Journal, in many cases, it is best to recognize the loss, from an accounting perspective, even before handing it over to the state. Speak to your tax advisor before the end of the year to review your list of potential unclaimed assets.

How to handle unclaimed property

• Learn about the laws in your state or any state where you have employees working. Pay particular attention to the time when an unclaimed property must be reported to the state.

• Establish policies and procedures for obtaining information on unclaimed resources and a schedule for reviewing the list and submitting annual notifications.

• Next, set a time to report and pay for uncollected properties each year.

State Audit

Finally, please note that uncollected properties do not belong to your company. States can monitor and verify unclaimed properties and impose fines and penalties for failure to comply with state laws.

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