In this day and age, CFOs grapple with a variety of financial and operational risks that could significantly impact their organizations. One that often escapes attention? Unclaimed property reporting. To prevent this risk from falling off the radar, which could result in costly audits, it is critical to address unclaimed property considerations before it’s too late.

Joe Carr Joe Carr

Unclaimed property reporting requires organizations (“holders”) to turn over to the state “intangible property” such as uncashed checks, credits, gift cards, merchandise credits, and rebates. The holders are legally required to turn over all qualified property that they hold on behalf of the payee (“apparent owner”) after a prescribed statutory dormancy period has elapsed.

Unclaimed property owed is sourced to the state of the last known name and address of the payee on record with the company. If no such record exists, then the unclaimed property is sourced to the state of incorporation of the corporate holder or the commercial domicile in the case of unincorporated entities.

Holders are required to file annual returns that report unclaimed property either under spring filings ranging between March 1 and July 1 due dates (in about seven states) and fall filings that are generally due October 31 or November 1 (for the remaining states). (It should be noted that some states require “negative reporting,” which means the filing of $0 returns where the organization owes nothing to the state after a review of its books and records.)

Historically, unclaimed property compliance is low compared to the number of organizations incorporated in or that operate in a particular state. As a result, states continue to audit holders for unclaimed property, with look-back periods extending as far back as 25 plus years in some states. A lack of compliance could lead to stiff penalties and interest charges to boot.

Who Audits Unclaimed Property?

While unclaimed property laws have been on the books in most states for quite some time, enforcement efforts have only been prevalent in a few states, including Delaware, over the last 15 years. This has now changed and many other states, including California, New York, Pennsylvania, and Texas, are auditing on their own. Unclaimed property audits have grown dramatically giving rise to an increase in third-party auditing firms servicing the states, incentivized by hefty commissions.

Auditors are generally compensated on a contingent fee basis up to as much as 12% of the assessment imposed on the company. Further, some of them may also be paid on an hourly basis (e.g., like a draw), which then is deducted against the contingent fee arrangement at the audit’s completion. Given the compensation method, many in the holder community have lobbied that this creates a conflict of interest giving rise to inflated assessments.

Preemptive Remedies for Mitigating Risk

Given the risks, CFOs may consider taking stock in preemptive remedies to help mitigate the financial and operational risks to their organization. If you are under an unclaimed property audit, consider the following steps:

• Execute non-disclosure agreements with the auditor (which will eliminate additional states piggy-backing on the audit).
• Form a steering committee comprising IT, Accounting, Tax and legal professionals.
• Assign a project leader.
• Manage information flow through SharePoint portals.
• Define active review procedures and protocol for dealing with auditors.

If you are not currently under audit, there are a number of actionable steps to keep top of mind. Voluntary disclosure programs, implementing policies and procedures, and maintaining an ongoing compliance process could assist in mitigating risk and increasing transparency.

Joe Carr is a partner in the state and local tax practice of BDO. He leads the firm’s national unclaimed property practice.