Even private clubs have 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. The states that have improved their efficacy of identifying and auditing many of the larger companies are now looking to smaller companies to continue to enforce compliance and raise revenue. Private clubs, including country clubs, golf clubs, city clubs and other private establishments, are not often thought of as having unclaimed property exposure. However, these organizations have been subject to more frequent audit notices and exposure resulting from payroll and vendor checks, membership fees, and equity interests, among other property. The following article summarizes why private clubs should be considering unclaimed property and what they should do now to ensure compliance.   

Unclaimed property audits come to the private club

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. Over the last 30 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.

Critically important, companies that fail to report and remit their unclaimed property are often targeted by contingent-fee unclaimed property auditors. These auditors, working on behalf of the states, seek to identify companies who have not reported, have under-reported, or who have had a gap in reporting. The auditors tend to use ambitious audit tactics, make comprehensive and exhaustive document requests, take years to complete their audits and demand large assessments, including interest and penalties, based on extensive extrapolation methodologies. 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 companies in this industry.   

How does unclaimed property affect private clubs?

While the experience may be unique, private clubs share similarities with other industries, such as employing a wide-range of staff from custodial to professionals, purchasing food, beverages and equipment from various vendors, and maintaining real estate and equipment through numerous service providers. Private club operations often result in traditional unclaimed property types subject to reporting, such as 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 federal or state tax-exempt status. 

Takeaways

For companies of all sizes and across all industries, unclaimed property is an ongoing compliance obligation that does not resolve on its own. Many jurisdictions have limited or no statute of limitations for unclaimed property. If business records do not cover the state’s look-back period, the state of incorporation or organization may sample and extrapolate identified liabilities. Most state audit period covers a 10-to-15-year lookback. Furthermore, interest is imposed and penalties for failure to report can be assessed up to 100% 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.

Private clubs should review their records to determine their level of compliance with state unclaimed property laws. If exposure is identified, voluntary disclosure agreements may limit the audit look-back period, reduce or eliminate penalties and interest, and limit future risk of audit. Due to the nature of third-party auditors, unclaimed property audits can be extremely time-consuming and staff-intensive. In the event of an audit, it is critical to respond thoroughly and diligently. Private clubs with significant operations, staffing, or vendors should consider consultation with an unclaimed property specialist who can assist with navigating the audit process and obtaining a favorable resolution.