Unclaimed property concerns for government contractors
INSIGHT ARTICLE |
There has been a recent increase in the enforcement of the unclaimed property laws on federal government contractors. Several government contractors have been targeted for unclaimed property audits by contingent fee auditors. These auditors, who work on behalf of the states, target companies that 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 the imposition of penalties and interest. All government contractors need to be aware of their unclaimed property compliance obligations and ensure they are reporting annually and reporting adequately, particularly given the recent increase in audit activity in this industry.
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 government contractors, are unaware of these requirements and may unknowingly be in violation of state regulations. During the course of the last decade, 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, including government contractors.
Government contractors are subject to reporting the standard unclaimed property types which include uncashed payroll checks, uncashed vendor checks, unclaimed insurance benefits, unclaimed interest and dividends and accounts receivable credits. Complicating matters is the client make-up for companies in this industry. For those government contractors who solely transact with the federal government, the unclaimed property liability with respect to credits may be mitigated with their mandatory strict adherence to Federal Acquisition Regulations (FAR). FAR provides specific rules concerning disposition of credits in connection with government contractors leading to a conflict in what states assert is property owed to them. However, many government contractors have a commercial component to their business, which may fall outside of FAR, often times leading to an oversight in holder reporting. The states’ contingent fee auditors take a very different position with respect to this component of the business, and the unclaimed property liability associated with it. Further complicating matters is the division between prime contracts and subcontracts and how FAR is applied in these circumstances. Additional issues arise with the disclosure of federally classified information to a state.
Whether operating in government contracting or any other type of industry, 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, in many jurisdictions, audit periods go back to the year the state enacted its unclaimed property statute. For example, Delaware has historically audited companies back to 1981. 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.
As a government contractor, review your records to determine the 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. They can handle your annual reporting requirements if you choose to outsource this function. If you have an unreported past-due liability, tax professionals can help to quantify your liability and assist with filing voluntary disclosure agreements (VDA) where available. VDAs can limit your look-back period, reduce or eliminate penalties and interest, and limit your risk of audit.