Update on State Unclaimed Property Audits

Blog post by Moyer & Osibodu

It is no longer a big secret that the states have stepped-up the enforcement of their unclaimed property laws. Within the last month or so, some companies have received audit notices from the state of Delaware.  This audit campaign is expected to go on for the foreseeable future, partly due to the fact that a lot of Delaware incorporated entities have not availed themselves of the state’s voluntary disclosure program launched in July 1, 2012.  This program is administered by the Delaware Secretary of State and will sunset in June 30, 2015.  There are various incentives for companies to participate in the voluntary disclosure program, one of which is to significantly minimize the possibility of an unclaimed property audit. 

Various states have voluntary disclosure and amnesty programs to promote compliance.  Regardless of these programs, a lot of companies have a “wait and see approach” when it comes to their unclaimed property compliance.  The states are very much aware of the low compliance rate and they are making efforts to improve the compliance rate through their various enforcement audits.  It is very common for the unclaimed property audits to be conducted by contract or contingency-fee auditors.  In addition, these audits tend to be multi-state audits because the auditors usually have contracts with multiple states. 

In addition to Delaware, states such as Tennessee, Illinois and Michigan have active audit programs and also engage the services of contract auditors to perform their audits.  Each state is granted the authority by their statutes to examine a company’s books and records to ensure that the company has complied with the provisions of their unclaimed property laws.  In addition, states, especially the company’s state of incorporation, have the authority to estimate a company’s unclaimed property in situations where records are no longer available.  These auditors tend to request lots of records and data, which would require significant amount of resources from the company to satisfy the audit.

Companies in certain industries are “sitting ducks” when it comes to targets for unclaimed property audits (please refer to our January blog for the 12 reasons companies may be selected for unclaimed property audits).  The states’ unclaimed property audits are not going to disappear any time soon and the best “audit defense” is for a company to comply with the unclaimed property laws before the states come knocking on the company’s doors.