Unclaimed Property Audit Series – Audit Environment

Today’s Unclaimed Property Audit Environment

Unclaimed property audits present a significant concern for any company possessing property belonging to customers, vendors, employees or others. To explain the audit process and considerations for businesses facing an audit, MarketSphere is pleased to present a four-part Unclaimed Property Audit blog series, beginning with this post, highlighting today’s unclaimed property audit environment.

Unclaimed Property Basics

All 50 states, the District of Columbia, Guam, Puerto Rico, the US Virgin Islands, American Samoa, and the Northern Mariana Islands have unclaimed or abandoned property laws. These laws govern how companies, known as holders, in possession of property owned by others, must handle that property when contact with its owners has ceased.

Unclaimed property can be tangible, such as items stored in a safe deposit box at a bank or credit union, or intangible, such as securities, uncashed checks, merchandise credits or other general ledger items. If an owner does not take action or claim his or her property within a specific period of time, known as the dormancy period, as set forth in the applicable state’s unclaimed property law, the holder must first notify the owner that the property will be reported and remitted to the state as unclaimed property if the owner does not act on his or her account within a certain period of time.  If there is no response, for most property types, the holder must report the property in accordance with the priority rules, which dictate that property is reported to the state of the owner’s last-known address, per the books and records of the holder, or, if the address is unknown, to the holder’s state of incorporation. This process is known as escheatment.

Enforcement Trends

States have expanded their interest in unclaimed property and holder compliance with the unclaimed property laws over the years, resulting in a steady flow of legislation and regulations. In recent years, many states have updated their statutes based on the Revised Uniform Unclaimed Property Act of 2016. Others have made incremental changes, in some cases to account for new property types, including virtual currency and online sports wagering.

Delaware has been especially active in revising its unclaimed property statutes in response to litigation. Over a million companies are incorporated in Delaware, where unclaimed property may revert to the state of incorporation if the owner’s address is unknown. Additionally, if estimation techniques are used to assess unclaimed property liability due to inadequate records for certain years within the required retention period, the state has intensified its enforcement of unclaimed property laws. This has resulted in audits and has led to litigation targeting Delaware’s enforcement and audit practices. The state has been forced to implement changes based, in part, on court rulings holding its practices problematic.

States have a lot to gain by enforcing their unclaimed property statutes. Holders who fail to comply may be subject to substantial penalties and interest. For example, Nevada has one of the highest annual unclaimed property interest rates at 18% annually. The state also charges a $200 per day late-filing penalty, capped at $5,000. Similarly, California assesses 12% interest on any late-reported property from the date the property was required to be reported until the actual reporting date.

Enforcement

States are increasingly conducting outreach to ensure that holders comply with the unclaimed property requirements.  State enforcement can take several forms:

• Audits: When a state identifies a holder that it believes has failed to report unclaimed property correctly, the state may conduct an examination, or audit, of the company’s records to establish and collect past-due property plus penalties and interest. States often contract with third-party auditors to conduct such examinations, which frequently last several years and may expand into multi-state audits. The audit process is both laborious and costly for targeted holders.
• Voluntary Disclosure Agreements (VDAs): Some states offer voluntary disclosure programs, or amnesty programs, that encourage holders to come into compliance voluntarily. California is the most recent state to implement such a program. Under a state amnesty program, holders not currently under examination come into compliance, escheating past-due property. States with such programs typically agree to waive penalties and interest for participating companies.
• Self-Audits/Reviews: Several states have begun sending self-audit notices to holders they believe have failed to report unclaimed property. Holders are asked to complete a questionnaire and work with their third-party auditor to resolve any areas of non-compliance. Failure to respond may trigger an audit.
• Verified Reports: Delaware has started mailing letters to holders, asking them to review their most recent unclaimed property report, and to certify that it is accurate or requesting that they correct any errors. Holders are also asked to provide a copy of their unclaimed property policies and procedures.
• Compliance Reviews: Holders who fail to adequately respond to verified report requests or claim that they do not have any unclaimed property to report may receive a compliance review request. A shorter review than a full-fledged audit, compliance reviews request documents supporting the most recent unclaimed property report. If the state finds inaccurate reporting, it may collect the amount due and/or refer the holder for a voluntary disclosure program invitation and, if declined, a subsequent audit.
• Legal Actions: In addition to the above listed enforcement mechanisms, over the last few years we have seen an uptick in false claims act lawsuits being filed by state attorneys general and whistleblowers. If the holder does not prevail, they may be subject to treble damages, which means three times the amount of the underreported property, not to mention the negative publicity that would surround the holder. These actions increase the risk and potential damage that companies are facing related to unclaimed property non-compliance.

Audit Triggers

Any number of events may trigger an unclaimed property audit. Mergers and acquisitions can put a company at risk if one or more of the companies involved in the transaction is out of compliance. If a state believes that a holder has under-reported or notices significant changes in reporting from one year to the next, it may believe an audit is warranted. Similarly, when a state notices the absence of common property types for a particular industry in a holder’s report, it may proceed with an audit.

Navigating the intricacies of unclaimed property compliance can be challenging. Watch for our next Audit Series blog post, which will help holders understand what to do when receiving an audit letter is received.

For help with your unclaimed property needs, contact us so  that we may assist you in considering your available options and determining your next steps.

*Content contained in this article is considered accurate as of the publish date.