In recent days, Keane has learned that Idaho is no longer accepting reciprocal unclaimed property reports, meaning the state will not accept property owed to another state within a holder’s annual report. These properties should be filed on a separate report and sent to the rightful state to which the property is owed.
In light of this recent event, Keane believes it is in the best interest of the holder community to provide a refresher on the potential risks of reciprocal escheat reporting. While the practice of filing reciprocal reports appears to be a great option for reducing the reporting burden; we recommend that companies be extremely cautious when considering this option.
What is Reciprocal Unclaimed Property Reporting?
Years ago, many states entered into reciprocal agreements that permitted holders to report property for other states to a “primary” or “agent” state (i.e. the state of the company’s headquarters or primary operations). The states would then exchange property, most commonly on an annual basis. Each state provided a list of the states for which they accepted reciprocal property along with their holder reporting instructions.
The reciprocity agreement was originally intended only for de minimis amounts or incidental property. Although not specifically defined by most states, it was assumed to be limited to a small number of items and small dollar amounts (i.e. ten or fewer properties valued at $1,000 or less).
Does Reciprocal Escheat Reporting Really Reduce the Reporting Burden?
Even if you choose to report multiple states’ property via a single state report, the property still needs to be analyzed and reported based on the applicable state law.
You need to consider multiple dormancy periods, due diligence requirements, and aggregate amounts. If you combine property for the Spring and Fall states, you must also be cautious of the various cut-off dates for each state (i.e. June 30, December 31, March 31).
Does Unclaimed Property Reciprocity Really Exist?
Unless a formal, written agreement exists between the states, a holder is required “by law” to file the property to the state of the owner’s last known address. It is not clear how many states actually have formal written agreements allowing them to accept property on behalf of another state.
Property may also be exchanged through informal courtesy agreements between the states, meaning that the state’s willingness to reciprocate can change on an annual basis. Additionally, some states will only reciprocate to those that send them money. Therefore, there is no guarantee that the money you report will be forwarded to the appropriate jurisdiction.
What are the Risks Associated with Reciprocal Escheat Reporting?
While it is clear that holders are indemnified when unclaimed property is reported according to the applicable state law, it is not clear if holders are indemnified by the state for out of state property. Consider the following scenario:
Company A is selected for audit by multiple states who have engaged a third-party auditor to conduct the audit. During the audit, it is noted that Company A has filed reciprocal reports to its primary state of operations for many years.
Assuming the property was never forwarded to the appropriate states…
- Can the states of the owners’ last known addresses make a demand for that property?
- Is the primary state required by law to indemnify the holder for the out of state property that was reported?
- Can the audit states legally demand property that reported to another state?
In our experience, holders are often caught in a “tug of war” between the states. In many cases, the states demand the property from the holders and advise them to seek reimbursement from the state to which they reported incorrectly.
Owner Related Risks with Reciprocal Reporting
There is also an increased risk that the owner may not be reunited with the reciprocally reported property. States may not send notifications, advertise, or make any efforts to locate owners of the out of state property.
Further, if an owner comes forward to collect his or her funds, it might be difficult for them to file a claim. They may have to contact both states in an effort to find the property and the claim could be delayed for a significant amount of time if the property is in the process of being forwarded from the primary state to the state of the owner’s last known address.
Under no circumstances should securities-related property be filed reciprocally to any state other than to the state with the appropriate jurisdiction. This is due to fluctuation in share value, and to ensure that your company receives the necessary release and indemnification.
Audit & Penalty Related Risks
Reciprocal escheat reporting can also increase your risk of an audit. It might appear that you are not filing reports or may increase speculation that the reports filed reciprocally are not complete.
More and more states are assessing penalties and interest on property that is past due when reported. States could choose to assess interest from the due date up until the property was received from the reciprocal state. This could result in significant liability if the state is not transferring the property in a timely manner.
Closing Thoughts on Escheat Reporting Reciprocity
Holders who choose to file reciprocally to another state should proceed with caution.
Although reciprocal unclaimed property reporting of smaller amounts or few owners is permitted by many states, most states prefer that holders file directly with their state. This is especially true as advances in technology have made preparing and filing electronic reports in multiple states much easier than when paper reporting was required.
Since property must be filed in accordance with applicable state law, filing reciprocally doesn’t necessarily relieve the holder of the additional time and burden it takes to understand and abide by each state’s reporting requirements. There is also no guarantee that the states will exchange the property in a timely manner, which can cause a multitude of problems.
If your organization has typically relied on reporting reciprocally and needs assistance in preparing reports in various jurisdictions, contact Keane for help.