by Brian Kelley
Sikich LLP is an IMA Member
In the summer of 2017, Illinois finally passed a state tax budget, SB9, that among many other things increased the individual tax rate to 4.95 percent. One item in the budget, it should be noted, that could have easily been overlooked was the significant change Illinois made to its unclaimed property reporting requirements. We discuss these changes in the following paragraphs.
BACKGROUND
Unclaimed property typically consists of financial assets for which the company is not the owner but continues to have possession. This can include uncashed payroll or vendor checks, unapplied customer deposits or credit balances, uncashed dividend checks, and voided checks that lack proof of having been reissued. All states have laws that require such property to be handed over to the state when the owner has had no contact with the business for what is referred to as a dormancy period (now typically three years in Illinois). The unclaimed property is reported to the state of the owner’s last known address; however, when that is unknown, it is reported to the state where the business is incorporated or organized.
NEW ILLINOIS UNCLAIMED REPORTING ISSUE & FILING DEADLINE
Many Illinois businesses may have not filed state unclaimed property reports, as Illinois previously discharged most business-to-business transactions. That changed on January 1, 2018 when Illinois repealed and replaced its Unclaimed Property Act as part of the SB9 Budget Bill. The new Unclaimed Property Act made several changes, including decreasing most dormancy periods from five to three years and eliminating the business-to-business transaction exemption. The new law also imposed a five-year retroactive lookback period to require reporting of property that was previously exempt but is now considered abandoned (thus needs to be reported as unclaimed property).
The last item can be considered particularly worrisome, since it effectively causes the lookback period to extend back to 2009 for purposes of applying the new law. To offer an example: an uncashed check paid to a vendor (a previously exempt business-to business-transaction) in 2009 would be considered abandoned under the new law in 2012 and required to be reported in 2013, which is within the five-year retroactive lookback period. Therefore, many businesses that previously believed they did not have any unclaimed property to report may now be subject to such reporting requirements involving unclaimed property as far back as 2009.
For most businesses, especially (those in the manufacturing, services, wholesale/retail, utilities, transportation, and life insurance sectors, the test is done on an annual calendar year basis and the unclaimed property reports and related payments are due May 1. Although 2018 has come and gone, the Illinois State Treasurer’s Office has informally indicated that they will accept the filing of any unclaimed property in prior years (not just for property that became abandoned in 2018) by the May 1 deadline without imposition of penalties.
OPTIONS AND NEXT STEPS
If interested in submitting a “catch-up” unclaimed property report by the May 1 deadline, the first step is to identify the unclaimed property and the addresses of such holders. Notification letters should be issued as soon as possible for those holders with known addresses to inform them of the details of the unclaimed property. Those holders will then need to contact your business by a certain date to communicate what they wish to be done with the unclaimed property. If they do not make contact in time, then the letter should inform them that the unclaimed property will be issued to the Illinois State Treasurer’s office, and that they can file a claim with that Department in order to receive their unclaimed property.
After the May 1 deadline, any desire to report prior year unclaimed property without having to deal with the imposition of penalties will likely require participation in a formal voluntary disclosure program. Please note that once an audit examination has begun, there won’t be an opportunity to participate in the voluntary disclosure program. The formal voluntary disclosure program may be in the best interest of those companies with significant unclaimed property exposure to provide formal contractual voluntary disclosure agreement protections for the abatement of penalties and interest. The voluntary disclosure program does require that a self-review of the presumptive abandonment period, plus 10 years (13 years in total), be performed.
States are continually getting more aggressive in pursuing unclaimed property, and it is expected that Illinois will significantly ramp up their efforts in this area due to the new law. The Illinois State Treasurer’s Office does offer more information regarding its unclaimed property reporting requirements on its website.
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