Unclaimed property audits: George Orwell would be proud.

• Author: Sweeney, Timothy J.

In his book 1984, George Orwell described a totalitarian state where Big Brother monitored every person's movements and government employees, such as Winston Smith, worked in the Records Department of the Ministry of Truth, rewriting and altering records of the past.

Sound familiar? It does to some companies undergoing unclaimed property audits. If you don't understand the analogy, you have not been sufficiently educated regarding the scope of state unclaimed property laws or the incumbent problems in resolving unclaimed property audits.

After reading this article, you should have a better idea of the application of unclaimed property laws and the issues faced by companies in complying with -- and state auditors in enforcing -- such laws.

What Is Unclaimed Property?

The concept of returning unclaimed or abandoned property to its rightful owner originated in English common law. These laws developed to prevent entities or individuals with custody of another's property (the "Holder") from retaining such property for their own benefit. Otherwise, the Holder would have little or no incentive to locate the rightful owner and return the property.

Many state legislatures have adopted statutes incorporating this same concept. Under these laws, a business holding another person's property cannot legally retain the unclaimed property for its own benefit, but must make efforts to locate the rightful owner and return the property. If the Holder of the property cannot locate the rightful owner within a certain period of time (the "dormancy period"), it must turn over ("escheat") such property to the State.

Unclaimed property generally includes any type of property "abandoned" by its rightful owner. Historically, unclaimed property included stock certificates, dividend checks, and bank accounts never claimed by their rightful owner. Recently, however, states have expanded their audit focus to include assessments for uncashed payroll, refund, or vendor checks; unclaimed credit balances, credit memos or duplicate payments; deposits; and unredeemed gift certificates and rebates (a category of property typically referred to as "intangible" property). In many states, this category of property includes any intangible property held or owing in the ordinary course of business. As a result, the property subject to escheat is not the uncashed checks themselves, but the underlying debt, obligation or liability.

What Happens to Unclaimed Property?

A Holder must remit unclaimed property to the applicable state, based on the payee or creditor's "last known address," if available. If the payee or creditor's last known address is unknown, the Holder must generally remit the unclaimed property to the payee's state of incorporation (for a corporation) or domicile (for non-corporate businesses). The state then independently attempts to locate the rightful owner. If the rightful owner does not claim the property after a certain period of time, the state may permanently claim the property for the benefit of the general public.

Why Should a Company Be Concerned About Unclaimed Property?

Unclaimed property audits are about the hottest and most...