Do you have a customer who deposited money with you and you now need to refund their deposit but cannot locate the customer?

Do you owe a refund to a customer but cannot locate them?

Unclaimed (or abandoned) Property consists of property held or owing in the ordinary course of business, which has not been claimed for a certain period of time by the owner.  Today, under the succession laws relating to property rights, states “step into the shoes” of the true owner and claim the same rights, second only to the missing true owner.  This property may include, among other forms of interest, a credit balance, a customer overpayment, a gift certificate, a security deposit, a refund, a credit memorandum, an unpaid wage, or an unused airline ticket.  Depending on the law of the state, a credit balance resulting from a business to business credit memorandum, gift cards bought for use and not redeemed as credit from a business, and overpayment of utility bills to municipally owned utilities are excluded from unclaimed property laws.  Nonetheless, all fifty states have an unclaimed property law that requires a holder to remit all unclaimed funds to the state. Because of these unclaimed property laws, all companies have a potential liability to one or more states for unclaimed property. 

For purposes of the unclaimed property laws, the holder of unclaimed property is any person or entity in possession of property belonging to another relating to a business purposes.  Possession remains with the holder because the owner of the property has failed to express a possessory interest in the property.  The property is presumed by the state to be “abandoned” upon expiration of the dormancy period, after which the state acquires a possessory interest in the property.

Indiana’s Unclaimed Property Act has varying dormancy periods depending on the type of property presumed abandoned, the terms of which vary between one (1) to fifteen (15) years.  During the dormancy period, the business holding the property interest must perform the requisite due diligence by attempting to contact the owner prior to remitting the funds to the state.  If the owner does not respond to such inquiries made by the business holder, and the owner does not communicate in writing with the holder concerning the property, and the owner does not give any indication of interest in the property, then the property is presumed abandoned.

Once property is deemed abandoned, the holder must remit the amount of money in the abandoned property interest to the state.  “Remittance” is accomplished by filing a report with the state that holds custody rights in the abandoned property.  Custody rights to the property vest in the state wherein the property owner’s last known address is located, as shown on the business records of the holder.  Therefore, if a business located in Indiana transacts with a client in California, California has custodial rights to the abandoned property.  Consequently, Indiana companies who transact business with clients and customers from various states other than Indiana must file annual reports with every state having custody rights over abandoned property left with or being held by the business holder.  Unclaimed property reporting is a time-consuming and burdensome duty.  Unfortunately, reporting and remittance of unclaimed property is a duty; it is not an optional task.  Significant liabilities are incurred by businesses who fail to comply with applicable reporting and remittance statutes.

Since dormancy periods last anywhere from one to fifteen years, the business holder may lose track of the amount of money and interest accruing from abandoned property.  If the business holder does not track and protect the funds or fails to file reports upon the dormancy period, then the business holder is subject to an audit and possible penalties imposed by the state.  In the absence of records, auditors are permitted to use estimation techniques to determine a business holder’s liability.  Not surprisingly, estimation techniques can result in large liability assessments to the holder.

Many states now view the enforcement of unclaimed property laws as a means to generate revenue.  States without the finances to conduct business audits using the states’ own employees will hire third-party contract auditors to perform audits on the state’s behalf.  Contract auditors are often compensated on a percentage basis, providing an incentive to track down all and any unclaimed property.

Business owners can protect themselves from such state audits and penalties by following these beneficial practices.

  1. Businesses should determine their own unclaimed property liability by keeping track of such property through meticulous record documentation.
  2. If a business has lost track of abandoned property, the business should conduct an internal audit to arrive at an estimate of its liability to the state, which may help in reducing the cost of liability if a state’s estimate of liability is higher than the business’ own internal audit.
  3. Proof of the business’ due diligence will enhance credibility of the business’ internal controls.
  4. Some states have a statute of limitations on auditing unclaimed property after a report has been filed, so timely filing the report to the state is imperative.
  5. Businesses may find an unclaimed property voluntary disclosure agreement       with a state advantageous if they can negotiate with the state for a reduced “look back” period, an abatement of penalties, an abatement of interest, and/or a control of estimation methodologies.
  6. Of course, the best practice is being informed of all obligations and rights of business owners when it comes to unclaimed property.

If you have any questions concerning your potential liability given your specific circumstances, or would like further details of how to comply with unclaimed property statutes, please call Attorney Dana Rifai (219.769.1313) at Burke Costanza & Cuppy LLP.

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