Unclaimed property audits are a growing concern for business owners across various industries. As states become more vigilant in enforcing compliance with unclaimed property laws, audits are on the rise, and the consequences of non-compliance can be severe. It is increasingly crucial for business owners to understand the audit process and take proactive steps to prepare.
Why Businesses Face Unclaimed Property Audits
States have a vested interest in enforcing unclaimed property laws because the funds that go unclaimed ultimately escheat to the state, adding to state revenue. Businesses are responsible for identifying unclaimed property, conducting due diligence to locate the owners, and reporting and remitting the property to the appropriate state.
However, intentional or unintentional non-compliance can result in significant liability, fines, and penalties. If a state suspects a business is not fully compliant, it may initiate an audit. These audits are typically conducted by third-party firms hired by multiple states on a contingency fee basis, meaning the auditors are incentivized to find under-reported liabilities.
What to Expect During an Unclaimed Property Audit
- Notification of the Audit:
The first step in an unclaimed property audit is receiving a formal audit notification from the state or a third-party audit firm that may be representing multiple states. The notice will outline the scope of the audit, the period under review, and the type of property that will be examined, such as uncashed payroll checks, vendor credits, gift cards, etc.
- Initial Meeting:
After the notification, there will typically be an initial meeting between the auditors and your business representatives. During this meeting, the auditors will explain their process, the timeline for the audit, and the documentation they require. This meeting is also an opportunity for the business to ask questions and clarify the scope of the audit.
- Initial Document Request (IDR)
The auditors will request various documents, including bank statements, accounting records, vendor payment records, and any unclaimed property reports previously filed with the state. They may also request policies and procedures related to unclaimed property, such as how your business tracks, reports, and remits unclaimed property. Be prepared for a broad request for information, as audits can cover multiple years and property types.
- Review and Analysis of Data:
The auditors will conduct an extensive review of the data you provide. They will look for unreported or under-reported unclaimed property, discrepancies in your records, and any gaps in compliance with state laws. The auditors may extrapolate missing information if your business has not kept accurate records or adhered to reporting requirements. Unfortunately, this can lead to inflated liability assessments.
- Interviews and Follow-Up Requests:
In some cases, auditors may interview key personnel involved in your unclaimed property management to understand your processes better. They may also issue follow-up requests for additional documentation or clarification of certain records.
- Preliminary Findings and Settlement:
Once the audit is complete, the auditors will issue their preliminary findings, which will include an assessment of any additional liabilities discovered during the audit. At this stage, businesses can dispute findings, provide further documentation, or negotiate a settlement.
- Final Report and Remittance:
After resolving any disputes, the auditors will issue a final report outlining the total unclaimed property liability. Your business must remit the property and any applicable interest or penalties to the state.
How to Minimize Risk an Unclaimed Property Audit
While it may not be completely possible to “audit proof” your company, there are steps businesses can take to ensure they are ready if an audit occurs:
- Maintain a strong unclaimed property reporting history. Avoid gaps in filings and file reports on time. If there is no property to file in a given year, file a negative report if the state requires one, but avoid filing strings of negative reports if the state does not require them. Doing so could raise red flags within the state.
- Maintain Complete and Accurate Records:
Keeping accurate records is essential to reducing liability during an audit. These records should include a detailed accounting of uncashed checks, outstanding vendor credits, unredeemed gift cards, and other potential forms of unclaimed property. Ensure that your documents are organized, up-to-date, and readily accessible.
- Implement Policies and Procedures:
Having well-documented, up-to-date, and consistently followed policies and procedures for identifying, reporting, and remitting unclaimed property can significantly reduce non-compliance risk. Ensure your employees are trained on these policies and that there is apparent oversight and accountability for unclaimed property management within your organization.
- Maintain customer contact
Do not wait until the state requires due diligence letters to be sent prior to the reporting deadline. Reach out to customers after checks become stale-dated, accounts are declared inactive, or the customer has a credit balance. Early outreach has a greater rate of response and can reduce the amount of due diligence required prior to reporting the account to the state.
- Work with Unclaimed Property Experts:
Managing unclaimed property compliance across multiple states can be complex and time-consuming. Engaging the services of unclaimed property experts or outsourcing your unclaimed property management can help ensure compliance and reduce the likelihood of an audit. Experts can thoroughly review your records, identify potential exposures, and help you address any gaps in compliance before an audit occurs.
Unclaimed property audits can be stressful and time-consuming for businesses, but the risks can be minimized with proper preparation. Companies can navigate the audit process more effectively by understanding what to expect during an audit and taking proactive steps to ensure compliance. For many businesses, working with unclaimed property experts is the best way to ensure compliance and reduce the risk of significant penalties.
Preparing for an audit helps you manage risk and reinforces your commitment to compliance and customer trust. With the right approach, businesses can successfully navigate the complexities of unclaimed property audits and protect themselves from unnecessary exposure and liability.
Dunbar is a reputable provider of unclaimed property compliance services, offering a comprehensive suite of solutions to help organizations remain compliant with all applicable laws. With a professional team with decades of experience, Dunbar is the ideal choice for businesses seeking a reliable and knowledgeable provider for their unclaimed property compliance needs.