CHAPTER 7: ACCOUNTING, RECORDS, AND ASSOCIATED REGULATIONS
Each state entity sets its own laws regarding unclaimed property dormancy periods, requirements for due diligence in seeking the owner, and reporting and escheat requirements. Owners can claim escheated property held by the state, though only a small percentage ultimately do. How does escheatment impact accounts receivable? Consider the following scenarios: Suppose you discovered that a customer had overpaid a prior month’s invoice because some of the merchandise in the shipment was damaged and returned. Normal procedure dictates that you issue a credit to that customer for the damaged merchandise, and you did so. Later, however, you find that the customer has not taken the credit. Is that credit subject to reporting and escheat to the state of the customer’s residence? Suppose you realize that you received a payment but cannot apply it to any customer account. Can you take the unused credit and unapplied cash into income? What if your company issues rebates to customers and some of the customers, while eligible for the rebate, have not cashed the rebate checks issued? Do the state unclaimed property laws apply to credits, unapplied cash, and rebates? It is possible that the unclaimed property laws apply in these scenarios, though laws vary and a few states provide certain B2B exemptions. If you are surprised that your credit balances, etc., might be subject to unclaimed property reporting and escheatment, you are in good company among your accounts receivable peers. States have become more aggressive in the number and intensity of unclaimed property audits and AR professionals are becoming painfully aware of their obligations— and the stiff financial penalties for noncompliance. ACHIEVING COMPLIANCE: RESOLVING PAST DUE LIABILITY If your business has not been reporting and remitting accounts receivable credits, unapplied cash, and/or rebates, it may have past due liability for these items. It is important to perform an internal review of your company’s potential liability, including regarding penalties and interest for noncompliance. (Note that most unclaimed property laws do not have an applicable statute of limitations for noncompliance, and in an audit, some unclaimed property auditors may consider liability as far back as 20 years.) The internal review should include substantive research and analysis to determine whether or not the items listed as outstanding are truly unclaimed property, whether the customer can be located to resolve the item, or if the item is exempted from state escheatment laws. This process is known as “minimization.” Once the internal review is completed, the options for limiting liability should be considered. In the U.S., the appropriate option to employ depends on the extent of the liability, the number of states to which the liability is owed, and your business’s reporting history. While a few states have formal amnesty programs, most states permit a business to undergo a “voluntary compliance process.” This process may include the use of voluntary disclosure agreements. For some states, this process is quite formal and may include a state audit. Other states have a more informal process. In either case, the business should attempt to retrieve a signed release and indemnification agreement from each state to which it has liability. The agreement should include language that absolves the business from liability for penalties and interest on the property that it remits as a result of the voluntary compliance process.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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