The Scenario: Your company issues a final paycheck to an employee who is moving out of town and leaves only a forwarding address. A year later, the check still hasn’t been cashed despite several letters your company has sent offering to void the original and reissue the check.
You know that your bank won’t cash the check now and you would like to just void it in your records and return the money to your general account.
The Reality: You can’t do that. Uncashed paychecks are a business liability that can be extinguished only when they are cashed. The fact that a check remains uncashed over a long period of time does not eliminate your company’s liability for the payment. Voiding or writing off the check and putting the money back into the general account understates your company’s wages.
In addition, uncashed checks carry property rights. After a specific interval of time that is determined by state laws, unclaimed checks become unclaimed property and are protected by state laws.
To ensure compliance, the American Institute of Certified Public Accountants suggests these steps:
1. Void the check and move the funds into an escrow account that is subject to careful internal control.
2. Pay the applicable employment tax, Social Security tax, and Medicare withholding.
3. Subject all transactions in and out of the escrow account to close scrutiny and supervisory review.
4. Find and retain available data that identifies the property owner.
5. Try to contact the payee at regular intervals, such as every six months.
A company that does not comply with state unclaimed property laws runs the risk of an audit. Interest and penalties could be assessed for not filing unclaimed property reports.
States generally aren’t concerned about unclaimed property if your company has a continuing relationship with the owner or if the last known address in your records is the owner’s current address. States require holders of unclaimed property to attempt to contact the owner before reporting the property.
Each state, plus some U.S. and Canadian jurisdictions, have statutes that specify dormancy periods. Once the dormancy period has passed, your company generally must file annual reports to the states, and some states require reports even if your company has no new unclaimed property for the current year.
When it comes to which state gets the reports, the U.S. Supreme Court ruled that the holder must report the unclaimed property to the state in which the owner’s last known address was located (Texas vs. New Jersey, 1954). If the owner’s address is missing or incomplete, the top court ruled that the holder should report the asset to its state of incorporation (Delaware vs. New York, 1992).
If your company is planning a merger or an acquisition, it’s wise to perform due diligence of the other company’s operations to identify all reportable unclaimed property.
Unclaimed property is a sensitive issue that requires careful handling. If there is any doubt that you have met the burden of due diligence, consult with a professional expert.