With the dramatic pandemic fall off in fiscal budgets, many American states have been taking a closer look at their abandoned property tax legislation, casting an ever-wider net for dormant accounts, and recognizing these unclaimed assets as revenue. This has resulted in increased scrutiny of financial institutions’ escheatment processes. Some states are using outside firms to locate abandoned property, paying them based on funds recovered, but also creating an incentive to escheat rather than locate the asset holder. Some are bringing institutions to court challenging perceived delays in sweeping to the state. The resulting penalties and interest payments can dwarf the actual escheatment amount.
In recent discussions with operations professionals the one consistent concern was the lack of clarity and best business practice within the industry. We ended up with more questions than answers amid growing concern at the fragmented approach to the legislation and the increasing threat of litigation.
Why don’t the states harmonize the notification timelines? Are firms required to escheat to the state where the bank is registered or to the state where the registered holder was last active, if that location is on file? When an account is classified as dormant does notification of the fact and final communication have to be via hardcopy alone or can it be electronic? Does escheatment apply to street side assets?
With the passing of the Secure Act in 2019 and the Cares Act in 2020, a further complication is the lack of alignment around the applicable age at which retirement funds are in scope for the IRS 10% withholding tax on unclaimed assets and when they fall under the federal laws.
Amid the confusion, and in the face of accumulating budget deficits, state audits are set to increase dramatically, some with no statute of limitation on the lookback period. Accurate data collection, documentation and client notification of unclaimed assets have long been the primary challenges confronting large institutions in the escheatment process. As legislative pressure mounts, there is a renewed imperative for these firms to implement rules-based data collection, sophisticated analytics and robust audit trails that will enable them to both ensure and evidence compliance with the rules, whatever the individual state variations.
