United States

Does your private club have any unclaimed property exposure?


In recent years, unclaimed property audit activity has increased for smaller companies–companies not traditionally known to have a large escheat exposure. Now that many of the larger companies have been audited, states are auditing smaller companies in an effort to continue to raise revenue. Even businesses such as small private medical practices and law offices are being audited and we suspect other types of small business, like private clubs, will be next on the states' radar.

Companies that don’t report and remit their unclaimed property are targeted for audits by contingent fee auditors. These auditors, who work on behalf of the states, target companies who have not reported, have under-reported, or who have had a gap in reporting. The auditors tend to use aggressive audit tactics, have intrusive and exhausting document requests, take years to complete their audits and demand large assessments with their extrapolation methodologies and imposition of penalties and interest. All private clubs need to be intimately aware of their unclaimed property compliance obligations and ensure they are reporting annually and reporting adequately, particularly given the recent audit activity on smaller sized companies.

What is unclaimed property?

Unclaimed property is defined as tangible or intangible money or assets held by an organization that has not had contact with the rightful owner for a specified period of time. This property must be reported to the appropriate state by the holder (the entity in possession of the property belonging to another). Many companies, particularly smaller and middle-market type companies, are unaware of these requirements and may unknowingly be in violation of state regulations. During the course of the last twenty years, many of the large Fortune 1000 companies have gone through exhaustive unclaimed property audits and been assessed millions of dollars. Many of those companies are now in compliance with the unclaimed property laws and the states have now shifted to auditing companies who have not traditionally been in compliance.

Private clubs are subject to reporting the standard unclaimed property types which include uncashed payroll checks, uncashed vendor checks, unclaimed insurance benefits, and accounts receivable (member) credits. Private clubs are also subject to reporting any refundable membership fees or equity interests that have not been returned to members.

It is also important to note that tax exempt clubs are still subject to unclaimed property reporting. Since unclaimed property is not a tax, but more of a contractual liability, all entities must report annually, regardless of their tax exempt status.

For companies of all sizes and across all industries, unclaimed property is a problem that does not go away. Many jurisdictions have limited or no statute of limitations for unclaimed property. If your records do not cover the state’s look-back period, the state of incorporation or organization may sample and extrapolate your liabilities. While some states limit the number of years that can be audited from 10 to 15 years, other states go back over 20 years. Furthermore, interest is imposed and penalties for failure to report can be assessed on up to 100 percent of the value of any property that should have been reported.  Additionally, audits are rarely conducted by the states, instead contract auditors are hired who perform audits on behalf of multiple states and receive a percentage of the calculated assessment.

Important Takeways

It’s recommended that all private clubs review their records to determine their level of compliance with state unclaimed property laws.  Experienced unclaimed property professionals can assist you with your review and help you to develop process improvements to close compliance gaps and control your risk.  Unclaimed property professionals can handle your annual reporting requirements if you choose to outsource this function and if you have an unreported past due liability, they can help to quantify your liability and assist with filing voluntary disclosure agreements (VDA) where available.  VDA’s can limit your look-back period, reduce or eliminate penalties and interest and limit your risk of audit.  In the unfortunate case of an unclaimed property audit, unclaimed property professionals with a deep specialized knowledge in this area who have strong working relationships with the states unclaimed property administrators and third-party auditors can help you to reach a favorable resolution and conclude your audit in a timely manner.