Scenario

Your company issues final paychecks to an employee who is moving out of town and leaves only a forwarding address. A year later, the employee still has uncashed paychecks despite several letters your company has sent offering to void the originals and reissue the checks.

You know that your bank won’t process the uncashed paychecks now and you would like to just void them in your records and return the money to your general account.

Your Options

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 paychecks 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.


Practical Tips

  • To avoid having state auditors estimate your company’s unclaimed property liability, adopt polices and procedures about how long to keep certain records. State unclaimed property laws generally require retention periods averaging 10 years.
  • Your company may need to use FASB Statement No. 5 to help account for unclaimed property liability on its financial statements. The FASB statement discloses a loss contingency that depends on whether the likelihood of the future event sparking the loss is probable, reasonably possible, or remote.

Quick Facts

Unclaimed property falls into two broad categories:
1. Securities-Related Property, which includes equity securities and related dividends, debt obligations and related interest, and dividend reinvestment accounts.
2. General Ledger Property, which typically includes uncashed payroll and vendor checks, customer credits, gift certificates, insurance policies and financial accounts.Dormancy varies according to the type of property but typically is:

-One year for payroll.

-Five years for most other property. However, depending on the type of property and the state in question, the legally prescribed dormancy periods may be three or seven years.