Unclaimed property: a FAS 5 minefield.

• Author: Buechler, William F.
• Position: Financial Accounting Standards No. 5

An article published last year in the Wall Street Journal, "States Scooping Up Assets from Millions of Americans: 'Unclaimed Property' Fattens Public Coffers," highlights states' increased enforcement of unclaimed property laws. (1) In 2006, Waste Management, Inc. paid $20 million before tax to settle unclaimed property obligations going back as far as 1980. (2) The Waste Management audit started with a notice covering items such as uncashed payroll checks. These items demonstrate the risks of ignoring unclaimed property laws.

Unclaimed property typically results from the failure of an entity or person who is legally entitled to property to make a valid claim against the holder of the property (business) within a prescribed period of time. Basically, unclaimed property laws require businesses that have unclaimed property to report and remit such property to the appropriate state or states.

Many companies are not in compliance with unclaimed property reporting requirements but have performed a self-assessment of the potential liability and determined that it is not material. Recent case law and experience with unclaimed property audits suggests that many companies' self-assessments significantly understate the potential exposure that companies have as a result of possessing unclaimed property. A complete risk assessment is the key to reducing a company's unclaimed property exposure.

Defining Unclaimed Property

Common types of unclaimed property include unredeemed gift certificates, vendor credits, and outstanding checks, such as payroll and dividend checks. Although the laws regarding unclaimed property have existed for decades, enforcement has been inconsistent. States have had a limited number of auditors and focused their enforcement efforts on financial institutions and insurance companies. Owing to state revenue shortages and states' use of contract auditors, however, unclaimed property audits in the last decade have expanded beyond the financial and insurance industries.

Every state has some form of unclaimed property law. Although tax departments are often charged with responsibility for supporting unclaimed property audits, state unclaimed property claims are not taxes. Rather, the basic assumption underlying unclaimed property laws is that the enterprise is holding property belonging to someone who is legally entitled to the property. In many states there is no unclaimed property equivalent to taxpayers' rights, and no nexus requirements circumscribe an enterprise's potential liability. In addition, often there is no statute of limitation with respect to unclaimed property.

Although FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," (3) an interpretation of FASB Statement 109, "Accounting for Income Taxes," (4) does not require companies to recognize and measure positions taken with respect to sales and use tax, excise tax, property taxes, or unclaimed property, the disclosures required by the interpretation may well be of interest to federal, state, and local non-income tax auditors. For example, a North Carolina unclaimed property auditor might be very interested to learn that a company has income tax exposure in Texas but is not filing any unclaimed property reports in North Carolina.

Typically, if the enterprise has the complete last known address of the owner of the property in question, the state of the last known address has priority on the reporting of such property. For example, if a company has a complete address on file for the owner of an uncashed dividend check, and that address is in Portland, Oregon, the company may have an obligation to report the unclaimed property to Oregon--even if the company has no physical presence in Oregon and no tax filing requirements there. If the entity has only an incomplete address, or no address at all, for the property owner, the property likely defaults to...