Escheat Laws

[Snaggletooth]

What is your experience with uncashed checks?

I don't know whether the law is the same in every state, but in Tennessee there are escheat laws that force the maker to turn a record of uncashed checks over to the state. I believe the state then posts the information on their "Unclaimed Property" websites.

There are two tax implications with this:

1. What happens if the maker is our client and he (she) is not willing to do this? If the bank balance increases as a result, is this reportable and taxable as "other income?"
2. if the maker complies with the law, the bank balance on the balance sheet does increase, but is there an offsetting expense, and is the expense deductible?

[AusTaxCPA]

I would think that when the check was originally written there was a Credit to Cash In Bank and a Debit to something, probably an expense; so, it would seem that simply turning over a record of uncashed checks would not, by itself, create an entry on the books. Perhaps I am not understanding the question, but I would think that the only way for the bank balance to increase would be if the maker now had access to the funds, which I don't think happens with the Escheat laws. Typically the escheat laws mean that the asset (e.g. uncashed checks) are now the property of the state, so, once again the maker does not have a change in its bank balance per books. It might require an entry to (1) Void the checks (temporarily increasing the balance in the bank), and then, (2) Entering a new item (returning the balance in the bank back to its balance before the entry) - the bottom line effect of those two entries is no change to assets, liabilities or equity, so no taxable income or expense.

[RAG1775]

I agree with AusTaxCPA in that there are no tax implications here. It is merely a change in the payee; instead of a "vendor" for a refund who has not cashed the check, this is reversed and now the payee is the "State". It is now the states responsibility to hold on to the funds and attempt to get them to the appropriate party.
These laws certainly vary by state, as will any potential penalty. Some states have specific annual reporting requirements.

[Rapid Robert]

I have little experience with unclaimed property managed by the state, so this has been interesting so far. But I am a little puzzled, please help if you can.

1) a "record" of uncashed checks is just that - a record. Unless the state actually draws the funds from the maker's bank account, what's the point? The money may no longer be there when the payee gets around to claiming it.

2) does this only apply to businesses? As an individual, I've had checks that never got cashed because they were delayed in the mail so long (a month or more) that other payment arrangements were made. Is Tennessee expecting any individual to follow this rule?

3) What about stop payment? If I can't contact the payee after a number of months, I would just stop payment and wait for them to contact me, if ever. Of course if the payment is never completed, then I have to reverse the transaction in my books since I did not have the expense (cash basis).

4) Does the state indemnify the maker (hope that's the correct term). In other words, if the state takes control over the unclaimed funds for an uncashed check, is there any chance the maker could later be successfully sued for non-payment of the vendor's bill?

[RAG1775]

The taxpayer does in fact turn over the funds to the state. The state now has the funds. Apparently the state believes they are better suited to getting the funds to the rightful owner. Additionally, I would assume most states have a web site where you can search to see if you are owed any funds.
Not going to provide a legal opinion, but highly doubtful that a business can be sued for following the law of the specific state.
Some of the larger firms have individuals that specialize in this specific area.
See attached for Tennessee:

https://treasury.tn.gov/Unclaimed-Property/About-Unclaimed-Property/What-is-Unclaimed-Property

[AusTaxCPA]

Rapid Robert - In response to your question 2: Since you made other arrangements for payment, I don't believe that these are uncashed checks, they are simply voided and paid to the vendor in another way.