Unclaimed Property Audits: Disproving Assumption of Abandonment

January 7, 2016

One of the most frustrating aspects of an unclaimed property audit is that auditors sometimes assume certain properties are abandoned or unclaimed, when the holder believes the property should not be defined as unclaimed. If the holder doesn’t take specific action to prove the auditor’s claim is incorrect, the property will be considered abandoned or unclaimed for the purposes of the audit—and assessed accordingly.

In other words, the burden is on the holder to “disprove assumption of abandonment.” Due to the complexity of unclaimed property, varying state statutes, and different definitions of abandonment, this is easier said than done.

Auditors can get away with incorrectly defining certain properties as unclaimed simply because the holder has not kept good records. In other cases, there is fundamental disagreement about the nature of a property and whether or not it meets statutory definitions of abandoned and unclaimed property.

Sometimes it’s enough to present records demonstrating why an item should not be considered to be abandoned or unclaimed. When the situation is not clear-cut, holders must be prepared to make a case disproving assumption of abandonment. MarketSphere often assists our clients with this, helping to clarify the issues and prepare materials for presentation to auditors.

It helps if holders arm themselves with an understanding of the sources and types of unclaimed property within their organization before an audit ever takes place. Conducting a professional assessment to determine unclaimed property exposure and potential liabilities often helps uncover possible unclaimed property definition issues. It’s always better to identify potential issues before the auditor does!

A holder’s toolkit for disproving assumption of abandonment necessarily includes knowledge of common types of property that cause these issues. Here are a few examples to get you started:

Loyalty Program Points

For an obligation to be considered abandoned, the property must be fixed and certain. Auditors sometimes attempt to give a fixed value to points.

To fix it: As your company creates loyalty programs, ensure no fixed and certain value can be applied to points.

Unpaid Promotional Items

Even when an owner hasn’t paid for a promotional item, it could appear to have a cash value, for example when a customer receives a promotional coupon due to dissatisfaction.

To fix it: Properly identify promotional items in records. Also, make sure your promotions team is working with your unclaimed property team to avoid inadvertently creating unclaimed property.

Accounts Receivable Credit Balances

Auditors often identify discrete customer credits as unclaimed property without considering any debit balances for the same customer.

To fix it: It’s important to maintain the most accurate books and records possible, to allow the identification of all activity, both debits and credits for each individual customer/vendor. In this way, matching debits and credits for individual customers/vendors can be accomplished to ensure that only net credits are escheated.

Undocumented Escheated Property

When an auditor extrapolates liability for periods with incomplete records, the holder isn’t given proper credit for amounts previously remitted to states as unclaimed property. It’s up to the holder to press this issue and prove properties were remitted.

To fix it: Ideally, holders should retain all unclaimed property reports. If it isn’t possible to retrieve past reports internally, you can ask the auditor to request reports from the states.

Third-Party-Managed Unclaimed Property

Auditors rely on contracts and service agreements between third-party managers and holders to determine which party must escheat. When documents aren’t available, auditors will often take the default position that the holder has escheat liability.

To fix it: Ideally, holders should maintain all contracts and service agreements with third-party managers in a central location where they can be easily consulted. If contracts are not available, the holder can provide other supporting documentation, such as transaction data and correspondence.

All of these situations can be complicated from the perspective of disproving an assumption of abandonment during a conflict with an auditor. It is advisable to consult an unclaimed property expert to ensure all records and conditions avoid assumption of abandonment.

Every company is different. It falls to the unclaimed property lead in each holder’s company to continually assess and identify potential assumption of abandonment issues and manage records to provide solid support.

Categories: Audit & Consulting
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