Escheat Liability: Business Compliance Requirements

Escheat liability is a legal requirement for businesses, known as holders, to transfer abandoned financial assets to the proper state authority. State laws govern this process to prevent businesses from absorbing unclaimed funds and to provide a central location for owners to find their property. This is a complex area of compliance that affects nearly every business, regardless of size or industry.

Identifying Property Subject to Escheatment

Unclaimed property is any financial asset or tangible property left inactive by its owner for a specified period. Common examples of property subject to escheatment include:

• Uncashed payroll, commission, and vendor checks
• Customer overpayments, credits, or refunds
• Unredeemed gift cards and certificates
• Dormant bank or savings accounts
• Unclaimed security deposits for rentals or utilities
• Stock certificates, bonds, and uncashed dividend checks
• Unclaimed proceeds from insurance policies

Central to this process is the “dormancy period,” which is the legally defined time an asset must be inactive before it is considered abandoned. These periods are not standard across the country and differ based on the property type and the laws of the state where the owner was last known to reside. For example, the dormancy period for payroll checks might be one to three years, while for customer credits it could be three to five years.

Holder Due Diligence and Reporting Process

After a business identifies property that has reached its dormancy period, it must perform due diligence to provide the owner a final opportunity to claim their asset. This process requires the business to send a formal written notice to the owner’s last known address. This communication is time-sensitive and must be sent via first-class mail within a specific window, often 60 to 120 days before the state’s reporting deadline. The letter must inform the owner about the nature and value of the property and the impending transfer to the state if they do not respond. Some states may exempt this requirement if mail has previously been returned as undeliverable.

Following the due diligence period, the business must begin the annual reporting process. A separate unclaimed property report must be filed with each state where an owner has a last known address. If the owner’s address is unknown, the property is reported to the state where the business is incorporated.

The report must include the owner’s full name, last known address, a description of the property, its value, and the date it became dormant. To simplify this process for multi-state filers, many states have adopted a standardized reporting format developed by the National Association of Unclaimed Property Administrators (NAUPA). This allows for a more consistent data structure across jurisdictions.

Remitting Property and Record-Keeping

Once the annual unclaimed property report is filed, the business must remit the property to the state. This transfer of assets, or their cash equivalent, formally relieves the business of its liability, as the state then assumes responsibility for holding the property. Common submission methods include mailing a check for the total value or using an electronic funds transfer like an ACH or wire payment.

After remittance, the business must focus on long-term record-keeping as a defense in a potential state audit. Businesses must retain copies of all filed escheat reports, remittance confirmations, and documented proof of due diligence efforts. This documentation should account for every item identified as potentially unclaimed, including those returned to the owner.

State laws require businesses to retain these records for 10 years after the property is reported. When combined with the property’s original dormancy period of three to five years, the total effective retention period can be 13 to 15 years or more. This timeframe is important for protection during a state audit, which often has a similar lookback period.

Penalties for Non-Compliance

Failure to comply with escheat laws can lead to significant financial repercussions. States can impose penalties that include interest charges on the value of unreported property, with rates as high as 12% annually. States may also levy fixed statutory fines, which can be applied daily for continued non-compliance. For more serious violations, such as willful failure to report, penalties can be calculated as a percentage of the property’s value.

The risk of a state audit is a major concern, as states have become more aggressive in their enforcement. They often contract with third-party audit firms that work on a contingency-fee basis, giving them a financial incentive to find unreported property. A business facing an audit without proper records may be subject to an estimation of liability for years where records are missing.

To mitigate these outcomes, most states offer a Voluntary Disclosure Agreement (VDA) program. A VDA allows a non-compliant business to voluntarily report and remit past-due property. In exchange for this disclosure, states often agree to waive some or all of the associated interest and penalties, providing a path to compliance.