Eligible holders may elect into streamlined audit process
On Dec. 22, 2015, the state of Michigan enacted Senate Bill 538, (SB538), which amends the state’s unclaimed property statutes and establishes a streamlined audit process for election by eligible holders. Under the election, the goal is to complete the audit within 18 months of receipt of the audit notice. In addition, the lookback period is reduced and checks voided within 180 days of issuance are excluded from the examination. The legislation also contains a provision that applies to all holders that excludes certain property worth $25 or less from being escheatable. The law is retroactively applied to all audits in progress as of Aug. 15, 2015, provided the audit is not in litigation before the date of enactment.
Under Michigan law, a holder must escheat to the Michigan Treasurer property that is held, issued or owing in the ordinary course of business and that remains unclaimed for a specified period, generally one to three years. Holders must also maintain records identifying which property is escheatable and which is not. The Treasurer is authorized to examine these records to determine a holder’s compliance with the statutes. Furthermore, the use of third-party auditors and estimation techniques are authorized.
The audit lookback period is generally limited to transactions occurring within 10 years from within the duty to report arose, except for transactions between certain business entities, where the lookback period is limited to five years from the date the duty arose.
A holder is the entity or person in possession of the property belonging to another. Some types of property that Michigan’s statutes list as escheatable include:
- payroll checks
- accounts payable checks
- customer credits/credit memos
- checking, savings and other depository accounts
- security deposits
- insurance proceeds
Elective streamlined audit
Pursuant to SB538, an eligible holder being examined by the Treasurer may elect to utilize a streamlined audit process. The election is made by executing a nondisclosure agreement acceptable to the Treasurer within 30 days from the receipt of the audit notice.
For purposes of this election, eligible holder is defined as a corporation that meets one or more of the following criteria:
- A business whose principal place of business is in this state as evidenced by having 20 percent or more of its payroll or 20 percent or more of its owned or rented real and tangible personal property, excluding inventory, located in Michigan for the period under examination, or is a business where the majority of its officers that direct, control and coordinate the activities of the business are employed in Michigan.
- Has a subsidiary incorporated in Michigan and the subsidiary meets the criteria under the first item above.
- Is wholly owned by a corporation that is incorporated in Michigan and the parent meets the criteria under the first item above.
An audit conducted under the streamlined process needs to meet both of the following criteria:
- Be completed within a time frame jointly developed by the holder and the Administrator, with the goal of completing the audit within 18 months from the receipt of the audit notice.
- Be conducted according to standards set forth in Michigan’s rules and regulations promulgated in accordance with section 31(4).
Besides shortening the audit process, benefits of participating in the streamlined process are:
- Eligible holders electing the streamlined audit option, shorten the lookback period from 10 years to four years
- The audit excludes the examination of checks voided within 180 days from date of issuance
De minimis property
In addition to implementing the elective streamlined audit process discussed above, SB538 provides that, for all holders, property worth $25 or less generally would not be subject to escheatment (there are certain exceptions, such as dividends and stock, etc.).
Holders who are contacted for audit should evaluate whether they are eligible to elect to participate in the streamlined audit process. If a holder elects to participate, it would benefit from the shortened lookback period and the exclusion of checks voided within 180 days from issuance. In addition, all holders are no longer required to escheat eligible property valued at $25 or less. One benefit of the shortened lookback period would be that fewer holders would be subject to audit estimation techniques, as more holders would have complete records for all of the lookback years. If a holder has not been reporting unclaimed property to Michigan, it should consider participating in Michigan’s voluntary disclosure program, as it also has significant benefits (limited lookback period, waiver of interest and penalties, etc.), before being contacted for audit.