Laura Lane always elicits a few strange looks when she drives around town.
People are often confused by her car’s license plate, ESCHEAT, through which they mistakenly believe she is announcing her infidelity. But the reference is to a much more mundane law, and relatively speaking, more recent than the biblical rules of adultery.
Escheat finds its roots in English Common Law, dating back to medieval times. When the head of a family died without heirs, the land reverted back to the king. Today, when property goes unclaimed, businesses are required to report it and transfer the funds to the state, which holds it in trust until the owner or the heirs claim it.
Owners claim only about 20 percent; the remainder is kept by the state. Escheat laws have been on the books since the 1950s, but were generally enforced only for banks and insurance companies.
However, they apply to all businesses, says Lane, who heads the escheat division in the Cleveland regional office of Ernst & Young LLP. Any enterprise — from a sole proprietorship to an international conglomerate — with an accounts payable department where checks are being cut has potential unclaimed funds.
“It’s hard to believe, but people don’t cash checks or they get lost,” Lane says. “The more business you do, the more checks you cut. And, the more possible it is that over a period of time, you actually have checks that are not cashed. Those checks accumulate and that money’s still sitting on the books.”
Lane says it has become common practice for business owners to write to income unclaimed checks.
“Most companies don’t know there’s a law that says you can’t take it as income,” she says. “The businesses shouldn’t feel foolish or stupid. What they’ve been doing is very common. It’s illegal and they don’t know it.”
So what accounts are beholden to escheat laws? Many, says Lane. They include vendor checks, payroll checks, accounts receivable credit balances, pension benefits, unredeemed whole life policies, CDs, deposit accounts, safe deposit box contents, stocks, health benefits, jewelry left in a store and debit and credit differences for transportation companies.
State governments are aware of the huge windfall unclaimed funds generate and are now eagerly searching companies’ books for the missing money.
“The states have embarked on a fairly aggressive audit program,” Lane says. “What the states have done is to hire third party audit firms. For the most part, most of the states pay these bounty hunters a percentage fee based on what they find. They are extremely motivated to go out and really be aggressive and make an assessment.
“Under the unclaimed property laws, the burden is on the holder to disprove what the auditor says.”
Most businesses are unaware of the unclaimed property laws and could have years of funds written off to income. If an auditor examines a company’s books and finds money that should have been reported, interest and penalties can be tacked on. Fines of $100 a day may be assessed as far back as there are records. Lane recommends companies review their books for at least the last 10 years.
The news is not all bad, however.
Ohio has instituted an amnesty program, through which companies can voluntarily report their unclaimed property and avoid those extra fees. The amnesty program runs through the end of October 2000.
“The auditors are alive and well and working as we speak,” Lane says. “If you get a notice of audit in the meantime, the states will not allow you to participate in the amnesty program. The auditors aren’t waiting; they’re out there.
“What the states are saying is, ‘You’ve escaped the auditors piercing veil; if you’ve escaped that, you should come forward now before the auditor comes to you, because then it will be too late.'”
The good news
When it comes to unclaimed property, Ohio is really business friendly, Lane says.
“There’s a lot of consumer protection underlying the unclaimed property laws,” she says. “Where you run into an issue with businesses, it’s when businesses owe other businesses unclaimed money. Business owners in Ohio have waged a very successful battle to exempt in Ohio business-to-business unclaimed property from reporting.”
This, explains Lane, is a critical development. Members of the state chamber of commerce got together and argued that companies should know what money they’re owed. The argument was that they understand it’s consumer protection and they may walk away from a gift certificate, but when they are dealing with a business itself, it should be another story.
“Business owners are smart,” Lane says. “They know where their money is. They were surprisingly successful in getting that legislation passed. What it basically means is that if you’re an Ohio business and you’ve got property payable to another Ohio business, you don’t have to pay it over to the state.”
As far as Lane is concerned, the issue is very simple.
“The state should only get it if you can’t find the owner,” she says. “And that’s if they’ve moved or died and you have no way to reach their heirs.” How to reach: Ernst & Young LLP, (216) 861-5000
Daniel G. Jacobs ([email protected]) is senior editor of SBN.
