Banking & Finance and Government

Unclaimed property audits could increase

September 19, 2014
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Businesses with unclaimed property have a higher chance of becoming the subject of an audit, mostly due to an increase in the number of auditing firms across the country.

Unclaimed property includes such items as un-cashed payroll checks, un-cashed vendor checks, unclaimed stock or dividends, and unclaimed credits.

According to the Michigan Department of Treasury: “Any asset, tangible or intangible, belonging to a third party that remains unclaimed for a specified period of time is considered unclaimed property.”

Businesses have a specific number of years before they have to turn unclaimed property over to the government. The period of time is dependent on the type of unclaimed property.

“Un-cashed payroll checks must be turned over to the state after one year; most other property types, such as vendor checks and accounts receivables credit balances, must be turned over after three years,” according to the Treasury website.

Based on Michigan’s Uniform Unclaimed Property Act of 1995, businesses and government entities must “report and remit to the Michigan Department of Treasury abandoned and unclaimed property belonging to owners whose last known address is in Michigan. In addition, every business or government entity that is incorporated in Michigan must report and remit abandoned property belonging to owners where there is no known address.”

Michigan’s unclaimed property filing date is July 1, but businesses operating outside Michigan are likely to also have to file unclaimed property forms in the fall, either Oct. 31 or Nov. 1 in other states.

“Unclaimed property is a set of laws that are on every state’s books,” said Joe Carr, tax partner and national practice leader for unclaimed property services at BDO USA. “The state has the opportunity to do audits of companies that don’t file returns, or for companies that may have under-reported what they should pay.”

Carr said multistate companies should be sure to file unclaimed property documents in each state where it’s required.

He said compliance with the law has been overlooked in the past because it is not typically at the top of a business’s priorities list, but he said the increase in auditing agencies increases the importance of on-time and accurate filings.

Companies face fines for noncompliance.

“They can be charged penalties. Michigan charges a 25 percent penalty on the amount,” Carr said. “That is pretty standard. Some states will charge interest.”

Companies can take advantage of voluntary disclosure periods to come clean with any unclaimed property they haven’t claimed.

“Delaware Secretary of State Voluntary Disclosure program’s application date ends 9/30/2014. That’s important for Michigan companies because many are incorporated in Delaware,” he said.

“If any (Michigan companies) are Delaware incorporated and are over $100 million in annual revenue, you should seriously consider the Delaware Secretary of State Voluntary Disclosure program because that won’t be around much longer,” he added.

Voluntary disclosures and filing yearly unclaimed property forms are important because an audit can be more costly to a company.

“If they audit you, a lot of states will extend their look-back period further than what would be on a voluntary disclosure,” Carr said.

The increase in auditing firms also means companies have a greater chance of becoming the target of multiple audits by different states.

“There has been a pop-up of a lot of auditing firms — at least 10 or 11 now — that audit on behalf of states for contingency,” Carr said. “It used to be only three or four major ones. As a result, you may see companies under audit by multiple auditing firms for different states at the same time.”

Carr suggested several best practices to help businesses stay on top of unclaimed property claims.

“I think the first thing is they should evaluate if they have policies and procedures in place for handling and reporting unclaimed property,” he said.

He said companies should have internal policies, which include who is responsible, what property types are being reported, when they should be reported, and who is doing due diligence.

“There is a due diligence letter requirement in many states, where you have to reach out to the owner to verify whether or not it’s owed to him,” he said.

Second, Carr said keep a calendar with all the dates of when abandoned property returns need to be filed and when all events related to those filings need to be completed.

“The third thing is, if you haven’t filed abandoned property returns or you’ve under-reported, go through your books and records and evaluate whether there are transactions you may have missed,” Carr said.

He said to look for such things as legacy credits and accounts receivable voids and voided transactions, and to check payroll, accounts payable and third-party administrator accounts.

“If you think there is (a problem), you can evaluate filing a voluntary disclosure,” he said.

Companies should also evaluate having a void form, which is a two-page document used to keep track of the reason for voids. It provides supporting data that will help a company defend against any unclaimed property audits in the checks area.

Finally, companies should discuss with their legal counsel the appropriate document retention period for their records.

“That is huge with respect to defending an unclaimed property audit,” he said. “Without records they have to estimate.”

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