United States

Unclaimed property audits: Top 5 ways to mitigate your risk

INSIGHT ARTICLE  | 

Over the past year, RSM’s abandoned and unclaimed property practice has received an influx of inquiries from businesses selected for unclaimed property examination. It is clear that unclaimed property audits are on the rise. Some of this increase can be attributed to robust enforcement activities resulting from additional state resources dedicated to unclaimed property compliance and an increased use of third-party audit firms conducting audits on behalf of the states. Finally, states are using improved data analytics, artificial intelligence and software to identify nonfiling businesses; states are comparing these entities to tax and incorporation records.

It is no longer the nonfiling businesses that have the highest risk of receiving an audit notice. States are sending compliance reviews, questionnaires, self-audit invitations and other contacts as enforcement mechanisms to businesses they believe may have filed inaccurate, incomplete or false reports. These inquiries are generally an abbreviated review of filings compared to unclaimed property examinations. Holders are given specific time frames in which to complete the review and the states expect a prompt response to compliance review notices. If there is a finding of deficiency, the state can either collect and enforce that deficiency or, if the findings suggest a potentially larger compliance issue, refer the holder for a voluntary disclosure program invitation and/or subsequent exam.

We have identified five common triggers that may increase the likelihood of an unclaimed property audit and suggest tactics for businesses to deploy to mitigate their risk of a potential unclaimed property audit.

1. Mergers and acquisition activity

Often, mergers and acquisitions are highly visible, headline events. These announcements can lead states to visit the reporting history of the organizations involved. This is especially true in states where the organizations are incorporated and/or have a large presence. In order to avoid an audit that could affect one or more parties involved, the unclaimed property reporting history and risk of exposure of businesses being acquired should be vetted during the transaction due diligence process. For businesses who plan to sell, analyzing and mitigating their unclaimed property obligations prior to the sale can alleviate unexpected surprises during the transaction process. For businesses planning to acquire, obtaining a deeper understanding of a target entity’s unclaimed property exposure, beyond typical due diligence, may be recommended. In an equity/stock purchase, the acquirer generally assumes the unclaimed property liabilities of the target business and an adjustment of purchase price or escrow provisions may be warranted. Through an exposure analysis, potential liabilities can be quantified on a state-by-state basis, enabling decision-makers to lead the charge in resolving liabilities. The businesses can then notify states of their intention to enroll in voluntary disclosure programs, or pursue amnesty filings or first-time filings.

2. Filing an unclaimed property claim in jurisdiction(s) where the business has not historically filed.

Today, there are numerous mechanisms by which businesses or individuals can search and submit claims for funds that are held on their behalf by any number of jurisdictions. Upon claim submission, the jurisdictions or claim review administrators will seek to verify if the claimant business has a filing history with that particular jurisdiction. Not having a filing history could be a red-flag and result in a notice (e.g., an invitation to their voluntary program or an audit notice). Prior to businesses submitting claims for any identified property, it is advisable that businesses ensure they have a history of reporting property to the jurisdiction in which they are submitting claims or have conducted a thorough review to confirm the business does not have exposure.

3. Failure to report all property types.

Failing to report common property types for the business’s industry is a red-flag for audits. States generally expect that most businesses report common property types including accounts payable, payroll and accounts receivable credit balances (depending on industry) to indicate a complete annual filing. However, after consideration of the common property types, businesses need to ensure they are also reporting property types unique to their industry. The following table lists a few industries and some common industry-specific property types.

Industry

Relevant property types to report

Banking

Safety deposit contents, certified checks, money orders, traveler’s checks

Insurance

Claim payments, proceeds due to beneficiaries, premium refunds

Oil and gas

Royalty checks, suspense accounts, net revenue interest, mineral proceeds

Retail

Gift cards, merchandise credits, layaway deposits, rebates

Utility

Deposits, membership fees

As with any reporting or filing to a jurisdiction, ensuring complete and accurate reporting is the best course to mitigate audit risk.

4. Receipt of a state unclaimed property warning notice/request to file reports.

Receipt of notice or a request to file reports from a jurisdiction is a clear indication that your organization is on a state’s radar. Many of these notices provide a response deadline and if the response deadline is missed, it is likely that an audit notice is soon to follow. Some notices clearly state that if no response is received, an audit notice will be issued. The recommendation for this scenario is simple: do not disregard unclaimed property communications from the state. Respond in kind and pursue the self-audit programs offered by the respective state, if applicable.

5. Missed filings or incomplete filing history.

Organizations should consistently maintain a complete annual filing history. Omitting years of filings or excluding dormant years in a review could lead to an audit notice. Be aware of states that require a zero or negative report; even when no property is due to be escheated, the filing of the zero or negative reports evidences that the business has undertaken procedures to review its books and records on an annual basis and file the respective report. Where a zero or negative report is not required, it is generally recommended to remit a negative report, to continue your filing history with a jurisdiction and minimize any gaps in reporting. For states that do not permit negative reports, memorialize the review for that report year in order to defend the organization if a state issues a compliance review notice or desk audit to inquire about gaps in reporting.

While there are certainly more audit triggers than those listed above, holders should be diligent in identifying their unclaimed property risk exposure and pursue available self-review paths to compliance in order to avoid an audit. With more states acquiring unclaimed property expertise and other states increasing the use of third-party auditors, businesses should have a plan in place to respond to an unclaimed property notice.

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