Year-End Compliance for Multi-Party Escrow Accounts

Professionals in commercial banking do not typically enter the field anticipating late-night reconciliations of interest allocations on December 28. However, as year-end approaches, institutions managing multi-party accounts—such as those for property management or escrow services—often face recurring challenges related to accurate interest tracking and reporting.

Shortcuts taken earlier in the year can surface in December, underscoring the importance of robust processes. Below, we outline key compliance considerations to address proactively.

The Overlooked Challenge of 1099-INT Reporting

The IRS requires accurate issuance of Form 1099-INT for interest income of $10 or more, even in complex allocation scenarios. For example, interest earned on a security deposit (e.g., $15 total) may need to be split between parties, such as a property manager retaining a portion and the remainder allocated to the tenant. This may require separate 1099-INT forms reflecting the correct amounts and taxpayer identification numbers for each recipient.

In cases where a portion of the interest is treated as a fee to the commercial client rather than interest income, reporting may involve a 1099-INT for one party and a 1099-MISC (or equivalent) for the other. Accurate coding of these transactions throughout the year is essential to ensure compliance.

Manual reconciliation—cross-referencing bank statements with allocation records—can be time-intensive and error-prone. Specialized virtual account management platforms automate tracking of interest allocations and fee distinctions year-round, significantly reducing the burden of reconstructing records in late December.

Special Considerations for Funeral Home Clients

Accounts associated with funeral homes, particularly pre-need trusts, often follow different reporting requirements. Because these arrangements are typically structured as trusts or partnerships, they often require Schedule K-1 reporting rather than Form 1099.Institutions that maintain consistent account coding throughout the year are better positioned to handle client inquiries from accountants, avoiding last-minute complications.

Managing Uncashed Checks and Escheatment Obligations

States require reporting and remittance of unclaimed property—such as uncashed interest checks—after a dormancy period, typically 3–5 years. Proactive tracking, including good-faith efforts to locate payees, helps prevent issues during audits. Institutions with well-structured operations monitor these items continuously, while less formal approaches often face heightened scrutiny and complications when regulators inquire.

Recommended Year-End Checklist for Manual Processes

To ensure compliance when relying on manual systems, consider completing the following tasks promptly:

• Verify that all W-9 forms are current and align with payee records.
• Confirm interest allocation calculations for accounts with splits.
• Validate distinctions between interest-to-interest allocations and those treated as fees (potentially requiring 1099-MISC).
• Identify uncashed checks exceeding the state's dormancy period.
• Test the 1099 generation process in advance.
• Discuss K-1 requirements with funeral home clients as needed.

Institutions leveraging dedicated virtual account management platforms can typically automate these activities throughout the year, assuming the system is properly configured and maintained.

Key Takeaway

Year-end challenges in compliance and reporting are frequently indicators of opportunities to strengthen ongoing processes. Implementing reliable systems and controls throughout the year can transform December into a more efficient period, minimizing unnecessary urgency.