Any business with multiple employees or numerous vendor relationships will inevitably have to determine how an uncashed check issued by the business is to be treated. Though difficult to imagine in this economic downturn, failure by an employee or vendor to cash a check happens more often than some business owners think. For some businesses, the unclaimed funds are treated as additional income. Other businesses may take no action. The legal answer, however, is generally always the same: state unclaimed property laws provide that these types of unclaimed funds become abandoned property and must be remitted to the appropriate state agency following a stated period of time.
Though unclaimed property laws have been part of state statutes since the 1940s, most states have now adopted the Uniform Unclaimed Property Act, which was most recently revised in 1995 by the Uniform Law Commission.
Generally, the act provides guidelines for the reporting and disposition of unclaimed property and the penalties associated with the failure to adhere to such guidelines. Upon determination that the property satisfies the presumption of abandonment as set forth in the act, the property becomes subject to the custody of the state in which the owner is located. This last point should not go unnoticed. For example, assume a Michigan business has employees spread across multiple state jurisdictions. To the extent that business is the holder of unclaimed property belonging to these employees, the business must file reports and remit the unclaimed property in each state in which the respective employee resides.
Unclaimed property is generally deemed abandoned if it remains uncashed by the owner for more than three to five years. Depending on the property and the state, however, abandonment periods can be as great as seven years and as few as one year (the abandonment period applicable to uncashed employee payroll checks is generally one year).
All states require the business holding the unclaimed property to submit a report detailing the abandoned property to the state’s agency responsible for enforcing the act. Most states also require the holder to attempt to contact the apparent owner. Simultaneously with filing the report, the holder is typically required to deliver or pay to the state the abandoned property.
Penalties for failure to report and/or deliver unclaimed property can be severe, and, depending on the state, are outright excessive. In Michigan:
- A holder who fails to pay or deliver property within the time prescribed must pay to the Treasurer interest at the current monthly rate of 1 percentage point above the adjusted prime rate per annum per month on the property or value of the property from the date the property should have been paid or delivered;
- A holder who willfully fails to render any report shall pay a civil penalty of $100 for each day the report is withheld, but not more than $5,000;
- A holder who willfully fails to deliver property to the Treasurer shall pay a civil penalty equal to 25% of the value of the property that should have been paid or delivered.
Penalties may include fines of up to $1,000 per day the failure continues (up to a maximum amount), in addition to interest payments and even criminal penalties. Certain states, including Michigan, however, have established voluntary disclosure programs. In Michigan, the Treasurer is offering holders that have not filed sufficient unclaimed property reports with an opportunity to avoid penalty charges on any property voluntarily remitted. To be eligible, the holder must file unclaimed property reports for the previous four reporting years. Penalties will not apply to property voluntarily remitted; however, interest will be charged from the date the property should have been reported.
As states have stepped up enforcement of their unclaimed property laws, more and more businesses have begun to receive audit notices from state agencies. Not only can these audits be costly for a business, but the resulting penalties could be crippling as certain states can look back as far as 25 years to determine if the business is a holder of unclaimed property. Further, any business undergoing an audit is not permitted to participate in the state’s voluntary compliance program.