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The Cost of Found Money

Ignoring escheatment laws could leave your business open to liability.

Some business owners may look at an uncashed vendor check or unredeemed gift card as found money, but ignoring laws about abandoned property--also called escheatment--could be costly.

Escheatment is a common law--practiced in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands, as well as Quebec, British Columbia and Alberta in Canada--that reverts unclaimed property to the state of the property owner's last-known address after a defined period of time.

The National Association of Unclaimed Property Administrators (NAUPA) says that state treasurers and other agencies are currently holding $32.9 billion in unclaimed property. And according to Brooke Spotswood, an attorney in Mathews, Va., who handles escheatment matters, state treasury departments are conducting more audits to collect abandoned property on companies' books. "While they're mostly targeting big companies, any company with more than $100,000 in revenue should be paying attention," she says.

Payments are turned over to the state after a defined period of "dormancy" that typically is three years, says Robert Metzger, co-founder of Recap Inc., a consulting firm in Margate, Fla., that helps companies comply with escheatment laws. However, he cautions businesses to check state laws, as they do vary. Escheatable property also varies by state, ranging from uncashed payroll and expense checks to unused customer credits, gift cards or refunds to uncashed vendor checks. Failure to turn over these assets to the state custodian can mean stiff fines and penalties for companies. Laws often require that the holder of the unclaimed property make a good-faith effort to return it within the dormancy period and to turn over the last-known address of the property holder.

The easiest way to remain in compliance is to balance the company books regularly and keep records of any uncashed checks or unclaimed credits from year to year, Spotswood says. Then locate your state's escheatment reporting office and remit any outstanding payments or abandoned property there after your state's dormancy period ends. NAUPA hosts an interactive page with links to each state's reporting office (unclaimed.org/reporting/). It's also a good idea to check these sites once a year because guidelines can change.

Smaller companies may not have great volumes of escheatable property, but Metzger says that is not a good reason to avoid adhering to escheatment laws.

"It's a fairly simple practice for small businesses," he says. "Handing over escheatable property to the state also relieves your business of the responsibility of accounting for it. That's a benefit and it avoids any penalty for noncompliance."

Gwen Moran is a freelance writer and co-author of The Complete Idiot's Guide to Business Plans (Alpha, 2010).

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This article was originally published in the May 2010 print edition of Entrepreneur with the headline: The Cost of Found Money.

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