Many aspects of unclaimed property reporting can affect the outcome of an audit. For example, reporting property to the wrong state can lead to audit issues. One misused code can cause auditors to more closely examine every code. Preparation for an audit begins long before an audit appears on an unclaimed property holder’s radar.
Here are a few items that you should be aware of that, if not managed properly, could increase your chances of getting noticed for an escheat audit.
- Report Metrics – Some states include the collection of information regarding key corporate metrics. These metrics may be used by the state to determine corporate changes (especially acquisitions) that may have occurred.
- Property Types Reported – New property types reported may indicate a lack of reporting over prior years or no longer reported property may indicate a lack of reporting. The lack of property types or certain types of transactions may be an indication of improperly taken exemptions.
- Increase/Decrease in Property Reported – A significant increase is an indicator that not all property may have been reported in prior years or a decrease may suggest that not all property was reported for the year.
- Company Comparable – How do the property types, quantity and dollars reported compare to your company’s industry and/or entities of similar size.
- Incomplete Reports – State reporting requirements vary. Providing all required data across all states and proper authorizations, including notary if required, is important to ensure states do not flag companies for follow-up.
- Corporate Asset Recovery – Companies that are claiming unclaimed property, but not reporting correctly, will be a stand out red flag for the states.
Audits are time consuming and expensive. Unclaimed property auditing requirements for documentation are greater than what may be required for other types of audits. It is important to have robust policies and policies that ensure an audit trail is available at the end of the reporting cycle to demonstrate source transactions and their resolution. Supporting information is a necessity to confirm the correct reporting of items. For example, do you as a holder have support for:
- All owner data (name, address, etc.)?
- All amounts?
- All dates?
- All classifications of items reported?
- All items removed as a consequence of:
- Due diligence?
- Accounting errors?
- Performance of due diligence? (Some states may require an affirmation of due diligence performance on annual reports)
The audit trail frequently exists at the time of reporting. However, over time changes in personnel and/or systems frequently result in the breakage of the audit trail. You may also want to consider how well you communicate changes to the states. Providing them background of the drivers resulting in changes to your reporting metrics (e.g., property types reported, quantity and dollars), is helpful in reducing the likelihood of selection for an audit.
We’ve shared with you a few areas that can help keep your company off the escheat audit radar. There are no guarantees. In fact, one of the most common phrases you’ll hear from those that manage unclaimed property is: “It’s not if you’ll get an audit letter, it’s when you’ll get an audit letter.”
The key is to have unclaimed property policies and procedures in place that are effective, which can reduce the risk of errors and make the process easier in the event an audit. Consider engaging with a professional advisor if you need a review of your current processes. Professional advisors live and breathe unclaimed property, can draw on experiences from the many different companies they’ve worked with, and have fought side-by side with their clients through difficult audits.