Escheatment Compliance: Managing Unclaimed Property and Avoiding Penalties

Buried in your accounts payable system are thousands of dollars in unclaimed property that legally belongs to someone else. Outstanding checks that were never cashed, vendor credits that were never applied, customer refunds that were never claimed. Each represents a compliance obligation that many organizations overlook until an audit brings painful penalties.

Escheatment, the legal process of transferring unclaimed property to the state, affects every organization that issues payments or maintains credits on behalf of others. With all 50 states actively enforcing unclaimed property laws and penalties reaching 25% or more of the property value, plus interest, the financial stakes are significant. Yet many AP departments lack the visibility, processes, and tools to manage this compliance obligation effectively.

What Is Escheatment and Why Does It Matter?

Escheatment is based on the legal principle that property should not remain in limbo indefinitely. When a company holds money that belongs to someone else, whether a vendor, customer, or employee, and that person cannot be located or fails to claim the property for a specified period, the property “escheats” to the state. The state then holds the property as custodian, making it available to the rightful owner who may later come forward.

The Scale of the Problem

The numbers are staggering. States collectively hold over $80 billion in unclaimed property, with billions more added each year. For individual companies, the exposure can be substantial. An organization processing 50,000 checks annually with a 1% outstanding rate accumulates 500 uncashed checks per year. At an average value of $500 per check, that represents $250,000 in potential escheatment liability annually, plus penalties and interest if not properly reported.

Understanding Dormancy Periods

The “dormancy period” is the length of time property must remain unclaimed before it becomes reportable to the state. These periods vary significantly by state and property type, creating a complex compliance matrix for companies operating nationally.

State Variations

While many states have adopted versions of the Uniform Unclaimed Property Act, implementation varies widely:

• Check dormancy: Ranges from 1 year (Texas, Louisiana) to 5 years (Rhode Island, Vermont)
• Most common period: 3 years for outstanding checks in the majority of states
• Vendor credits: Often 3-5 years depending on the state
• Customer refunds: Typically 3 years, but some states use 1-2 years

Which State Gets the Property?

Determining the correct state for reporting follows a priority hierarchy established by Supreme Court decisions:

1. First priority: State of the owner's last known address
2. Second priority: State of incorporation of the holder (if no address is known)
3. Third priority: State where the transaction occurred (in limited cases)

This means companies incorporated in Delaware may report significant amounts to Delaware even when they have no operations there, simply because they lack good address information for the property owners.

The Escheatment Compliance Process

Meeting escheatment requirements involves a multi-step process that must be executed annually. Missing any step creates exposure for penalties and audit liability.

Due Diligence Requirements

Before reporting property to the state, most jurisdictions require a good-faith effort to locate the owner. This “due diligence” typically involves:

• Written notice: Sending a letter to the owner's last known address
• Timing: Usually 60-120 days before the report due date
• Content requirements: Specific language about the property and how to claim it
• Return mail: Document any returned mail as evidence of attempt
• Electronic options: Some states now allow email for due diligence

Managing Audit Risk

Unclaimed property audits have become a significant revenue source for states. Unlike traditional tax audits conducted by state employees, most unclaimed property audits are performed by third-party audit firms working on contingency fees. This creates aggressive enforcement with auditors financially motivated to find exposure.

Audit Characteristics

• Look-back periods: Typically 10-15 years, sometimes longer
• Multi-state coordination: One audit may cover 40+ states simultaneously
• Estimation: When records are incomplete, auditors use statistical estimates
• Duration: Audits often take 2-5 years to complete
• Cost: Legal and consulting fees alone can reach hundreds of thousands

Voluntary Disclosure Programs

Many states offer voluntary disclosure agreements (VDAs) that allow companies to proactively come into compliance with reduced penalties and shorter look-back periods. VDAs are particularly valuable for organizations that:

• Have never filed unclaimed property reports
• Have inconsistent or incomplete filing histories
• Discover significant unreported property
• Want to avoid third-party auditor involvement

Building an Effective Compliance Program

Sustainable escheatment compliance requires institutionalized processes, not annual fire drills. An effective program integrates unclaimed property management into regular AP operations.

Key Program Elements

• Ownership: Assign clear responsibility for escheatment compliance
• Inventory: Maintain a complete list of property types that may require reporting
• Tracking: Flag items approaching dormancy thresholds automatically
• Due diligence: Systematic outreach to owners before reporting
• Documentation: Retain all records needed for audit defense
• Reporting: Accurate, timely filing to all required states
• Training: Ensure staff understand escheatment implications of their work

Technology-Enabled Compliance

Modern AP automation platforms provide capabilities that dramatically simplify escheatment compliance:

• Automated aging: Track dormancy periods by state and property type
• Early warning alerts: Flag items approaching dormancy thresholds
• Owner verification: Validate contact information before payments go stale
• Due diligence automation: Generate and track required owner notifications
• Report generation: Create state-specific reports in required formats
• Audit trail: Maintain documentation for audit defense

Best Practices for AP Teams

While escheatment compliance often falls to tax or treasury departments, AP teams play a crucial role in minimizing exposure and supporting compliance:

1. Maintain accurate vendor data: Current addresses reduce uncashable check rates
2. Monitor outstanding payments: Follow up on checks not cleared within 30-60 days
3. Void stale checks promptly: Reissue or investigate rather than letting checks age
4. Apply credits proactively: Don't let vendor credits sit unused
5. Document exceptions: Keep records of why payments weren't completed
6. Coordinate with treasury: Ensure escheatment data needs are understood

Escheatment compliance is not optional, and the consequences of non-compliance are severe. But with proper processes, technology, and attention, organizations can minimize their exposure while protecting vendor relationships and avoiding the costly disruption of unclaimed property audits. The key is treating escheatment as an ongoing operational requirement rather than an annual compliance exercise.