Unclaimed property laws have been on the books for a long time, but audits were infrequent enough that many companies felt the odds of being audited were low. It’s possible this caused some companies to neglect compliance. However, audit frequency has increased in recent years, and most holders should assume they will be audited eventually.
The rise of unclaimed property auditing
In the late 1990s, some states realized companies might not have been complying. So, about 40 states got together in 1999 and formed an amnesty program, encouraging holders to comply voluntarily without fear of monetary penalties. After a period of about two years’ amnesty, the states felt holders had been given enough time to begin complying, and so they began sending more audit letters.
During that time, a number of Big 4 accounting consultants who had been working with unclaimed property holders formed third-party audit firms, such as Kelmar and Verus, to help the states complete audits. With this additional capacity for auditing, unclaimed property audit frequency increased once again.
In the late 2000’s, a substantial economic downturn compromised many states’ finances, and officials looked for ways to bolster state income without raising taxes. Unclaimed property provided a perfect opportunity to generate revenue by assessing fees and penalties for those who were not complying.
All of these developments worked together to increase the odds that a company holding abandoned and unclaimed property will be audited at some point.
Is it possible to avoid an unclaimed property audit?
In spite of what some people say, there is little a holder organization can do to avoid an abandoned and unclaimed property audit. The system is well established now, and — just like taxes — your company must carry out its unclaimed property responsibilities.
Rather than thinking in terms of avoiding an audit, think in terms of forging policies and processes that prepare your organization for best results in the event of an audit.
On the other hand, some situations can indicate an organization is more likely to be audited. This usually stems from habits of the auditing companies, something no holder can influence. For purposes of efficiency, auditors often will target organizations in specific categories as a group, so they can complete similar audits at the same time.
The following situations might indicate you are more likely to be audited than companies not falling within these categories:
- If your company files a claim form to recover unclaimed property on behalf of the company, and the company has never filed an unclaimed property report
- If your company is filing sales and use tax reports in a state, but isn’t filing an unclaimed property report in that state
- If an industry has been targeted for non-compliance and your company falls into that category (past industry targets have included banks, insurance companies, manufacturing companies, car dealerships and financial services organizations)
- If your company has no reporting history
- If your company is reporting, but isn’t including certain property types typical for companies in your industry (i.e., if a hospital, corporation, or communication company isn’t filing accounts receivable credit balances)
- If your company acquires another company and doesn’t file on behalf of the new company or show an increase in reporting
It’s not unusual for companies to check with others in their industry to see how they are handling compliance with unclaimed property laws. This can be helpful in determining how to best organize compliance efforts and prepare for the possibility of an audit, but benchmarking might not be a good way to determine the odds of an audit. Many companies will not want to admit they have been audited. They might believe an audit indicates they have done something wrong, even though being chosen for an audit does not necessarily indicate a company’s level of compliance.
To help ensure a best possible outcome if (when) your company is audited, simply establish good habits and review them annually — even if you have been through an audit before, performed a self-audit, or engaged a third-party consulting company to do an assessment. Just as with taxes and other regulatory mandates, parameters change. Your compliance activities must change, as well. Technology is a great example. New technologies generating unclaimed property, such as EFT’s, mobile banking and prepaid debit cards, were not readily available 10-20 years ago, and now they are common.
For more information to help you and your team prepare your organization to withstand the rigors of an abandoned and unclaimed property audit, refer to MarketSphere’s e-book, Armored Audit.