Tip: Manage the Two Faces of Escheatment The Cost Risk, and the Opportunity for Free Money

Any Credit Manager subjected to an Escheatment Audit knows the risk of ignoring aged unresolved credit balances. There is also an upside potential with opportunities to capitalize on balances carried by a State, waiting for a refund claim by the rightful owner. A periodic review could deliver untapped opportunities for your company to collect “free money.” 

The Downside Escheatment Risk

Escheatment Reviewed:

Escheatment is the process of transferring assets to the state that go unclaimed and dormant for a defined period of time. This is based on the state law where the account is held. Timeframes depend on State requirements but typically range from three to five years.

State governments are looking for sources of revenue. Escheatment claims can be seen as low-hanging fruit. 

Audit Risk:

Simply put, when the auditors arrive, they will review a relatively small sampling of open AR balances for violations. They will project the percent of dollars in violation and apply to all escheatment eligible credit balances within your AR. The specifics will vary State by State. These unexpected exposures go directly to bottom-line results. 

Escheatment audits are conducted by either state employees or in some cases third-party auditors who are paid on a contingency basis. Both have an incentive to maximize unclaimed property claims. There is an additional risk that if one state conducts a negative audit, additional states are likely to reach out as well. 

A Review of ten actions you can take to prevent this type of exposure:

1. 1. Create a formal escheatment compliance process as part of your company's credit collections policy.
   2. On an annual basis systematically work aged credit balances. 
   3. Make a diligent effort to locate the customer leaving a documented trail of attempted contacts and correspondence.
   4. Be aware of the timeframes allowed by the State where the account is held.
   5. Set up an annual review of your policy to ensure your company is in compliance with applicable State requirements. 
   6. If attempts to reach the customer are unsuccessful, forfeit unresolvable credits to the State in advance of a violation.
   7. If an aged item is identified as out of compliance, take advantage of any “cure” period offered by the applicable State. Attempt to reach the customer owed the credit for directions on how to dispose of the balance.
   8. Before you receive notice of a pending audit, check to see if the applicable state(s) have amnesty or voluntary compliance programs. Your company may be able to make late payments without being charged interest and penalties. 
   9. Train the Credit Team on escheatment compliance requirements, your company policy, and dispensation procedure.
   10. If your company is making an acquisition or taking on an additional AR portfolio, make an assessment of escheatment liability part of your due diligence and corrective action process.

The Upside Escheatment Opportunity, “Free Money”

Your company may be able to claim balances held by any State:

A seasoned Credit Today subscriber recently reported how he routinely scans unclaimed property records. Last year he discovered over $3M. A healthy refund for his company.

There are companies you can engage to do the searches and process claims for you. If you have the time, this is something you or a staff member can do on your own. The process is easy. Look up “Unclaimed Property” on State websites where your company does business. Follow the search prompts. If you have a claim, follow the prompts to begin the process of retrieving “free money” for your company. 

Conclusion:

Avoid the risk of a costly Escheatment Audit by having a process to identify and address unclaimed balances on a timely basis. At the same time capitalize on potential “free money” opportunities by conducting a periodic review of balances held by a State that can deliver “free money” to your company.

Watch this course on Credit Policy Training for Trade Creditors which will give you a detailed perspective on the benefits of an integrated credit, collections, and dispute management policy as well as a framework to build the credit policy.