Payroll professionals have a crucial role in identifying, tracking, and reporting unclaimed wages to prevent liability issues. As unclaimed property compliance evolves, with trends such as shorter dormancy periods and new property types like virtual currency and payroll cards, coordination across the organization is essential. This ensures that all relevant property types, beyond just payroll, are accurately reported to minimize potential audit concerns. Recently, Checkpoint Payroll Update discussed the various aspects of unclaimed wages with Cathleen Bucholtz, Principal and Unclaimed Property Practice Leader at Baker Tilly.
Trends and challenges in unclaimed wages
Unclaimed property compliance continues to evolve as states pass new laws and regulations, requiring companies to understand their obligations for identifying and timely reporting unclaimed property arising from payroll operations like uncashed paychecks, voided checks, and abandoned accounts, among other things.
“Nothing really happens quickly in unclaimed property and so we look at trends over time,” Bucholtz started. “And the trend has typically for payroll been to shorten dormancy periods…the age a check needs to be before it gets reported.” In a number of states, like California, Washington, and Wisconsin, the dormancy period is one year. For other tax jurisdictions, like the District of Columbia and New York, wages are presumed abandoned after three years (see Payroll Guide ¶17,055 ).
“It’s not a one-size-fits-all,” Bucholtz explained about the various state dormancy periods. “You have 54 jurisdictions that are governing, you know, the dormancy period for unclaimed wages,” she noted, adding the challenges involved with tracking state law changes for unclaimed property.
Bucholtz said that another trend she has observed is evolving property types. “Virtual currency has gotten a lot of attention recently,” she noted. Unclaimed property includes virtual currency in states like Indiana, Montana, New York, and West Virginia.
“Virtual currency is fascinating because it tends to be owner unknown and so…it’s hard to do due diligence or to follow up,” Bucholtz reasoned, adding that state tax jurisdictions also have issues in understanding how virtual currency works.
Bucholtz also mentioned how payroll cards have “become a topic with certain states having different NAUPA reporting codes for reporting payroll cards differently, say, than normal paychecks because payroll cards have become more common in the last several years.” While not all states have laws explicitly addressing paycards, many have enacted legislation affecting how paycard programs operate, such as Illinois, Maine, and Nevada.
Working with third-party providers
Employers must identify, track, and report unclaimed wages while adhering to the distinct reporting responsibilities and varying dormancy periods across states for different property types to maintain compliance. While some businesses use payroll outsourcing to help with some or all of the payroll process, Bucholtz warns companies not to let things “get sideways” when it comes to reporting responsibilities. She noted that it is important for payroll professionals to understand if the third-party provider offers reporting unclaimed property as a service, because many do not.
Bucholtz explained that after a payroll check goes uncashed for around 180 days, the third-party administrator will credit that amount back to the company on their periodic funding request report for upcoming payroll. However, these aged uncashed check amounts are often buried deep in the report, making it non-transparent to the company that the third-party is treating them as unclaimed property. She added that this can lead to companies unintentionally failing to properly report that unclaimed property.
“And so that’s really I think, where the confusion has come in, when we’ve seen it come up in audit, is that the payroll department wasn’t aware,” Bucholtz said, but noted that she has observed improvement between employers and third-parties regarding reporting responsibilities.
She additionally mentioned that simply providing a contract showing a third-party payroll administrator handles unclaimed property reporting is insufficient for auditors. Auditors will still demand to see detailed reports on what specific unclaimed property amounts have actually been reported.
Mitigating liability issues
To mitigate liability issues, Bucholtz said that it is crucial to track details like check numbers, amounts, payee information, and ages of uncashed checks, whether handled internally or through a third-party. She also stated that the core focus should be on having strong processes to actively manage outstanding payroll before it becomes unclaimed property, through proactive employee outreach and utilizing the right tools/services for comprehensive tracking and reporting.
“One of the best practices of a company to keep their payroll clean is to be tracking it when those checks become stale-dated,” Bucholtz said. She additionally advised businesses to never reissue an uncashed check without first confirming the need and details with the employee, as just reissuing stale checks is not a valid defense in audits.
Policies and procedures regarding audits
Bucholtz stressed the need for robust policies and procedures for tracking unclaimed payroll from check issuance through reporting. She said that documented processes should begin from paycheck issuance date and include proactive due diligence outreach efforts. Bucholtz also noted the importance of understanding state-specific reporting criteria and dormancy periods, in addition to maintaining contemporaneous documentation on follow-ups, reissued checks, and reason codes within payroll systems.
When it comes to audits, she explained that matching reissued checks to original uncashed amounts is difficult without detailed notes, so good, detailed documentation is paramount. “When the payroll department doesn’t make notes or track when a is reissued under audit, which usually happens, say every 10 years, it’s very hard to document – five years from now, 10 years from now – that a reissued check was related to a specific check that was for the exact same amount, but it was three months prior,” Bucholtz said.
For recordkeeping, Bucholtz suggested consolidating all unclaimed payroll records (reports, correspondence, etc.) in a dedicated, auditable repository and extending the record retention beyond the standard seven-year IRS policy to 10 to 15 years for unclaimed property compliance. Bucholtz said not to rely on third-party providers since many purge records after a few years, but more importantly because, ultimately, the reporting responsibility cannot be fully transferred to third-party companies. “You’ll be left holding the bag as a company when the audit comes,” she noted.
Keeping up with reporting
Bucholtz also touched on key reporting responsibilities for unclaimed wages, by providing California as an example of a state with a unique reporting method. California has a two-part reporting method with an initial report due in October, while the final “Remit Report” is due June 15. “That’s California’s process [and] it’s been that way for a number of years now,” Bucholtz said. She added that California now has a Voluntary Compliance Program (VCP) regarding unclaimed property.
“California was one of the very last states to offer such a program and it does offer the abatement of interest and penalty if a company finds out that they have past due payroll or unreported payroll and other property types,” Bucholtz noted.
Avoid this red flag
While payroll is a core unclaimed property type, Bucholtz said that reporting only payroll can raise audit red flags. She explained that payroll is often viewed as the quintessential unclaimed property that companies inherently understand must be reported. However, solely reporting payroll while omitting other property types can act as a red flag attracting state auditor scrutiny.
Bucholtz said that companies beginning to report unclaimed wages should coordinate across the organization to ensure all other applicable property types are identified and properly reported as well.
Artificial intelligence
When it comes to the use of artificial intelligence (AI) by practitioners and businesses to remain compliant with state unclaimed property laws, Bucholtz said that although she is not currently familiar with any programs currently operating, she “can definitely see it coming.” “It’s more automation…in the process than specifically…AI, but I suspect it’ll be sooner than later,” she explained about AI being involved in the unclaimed property process in the future.