Companies are now required to be more diligent than ever in meeting their responsibilities related to unclaimed property compliance. Clearview Group can help companies with analytic review, annual reporting, audit defense, VDA assistance and the development of policies and procedures.
Regardless of size or structure, companies across every industry have a responsibility to report unclaimed financial obligations, also known as “unclaimed property.” These obligations can include uncashed payroll and accounts payable checks, customer credit balances, gift cards, dormant checking or savings accounts, as well as dividends and stocks. Today, states are becoming more persistent in initiating audits and using more aggressive methods to increase unclaimed property assessments. As a result, companies need to carefully review their state unclaimed property obligations to be certain they are compliant.
When it comes to unclaimed property, the experienced state and local tax professionals at Baltimore-based consultancy Clearview Group can identify a company’s areas of need, develop a comprehensive plan to get the company into compliance and help maintain that compliance in the future.
How to Prepare Based on State Compliance Requirements
No two states are the same when it comes to unclaimed property compliance and audits. This can lead to several complications for companies, which is why Clearview Group seeks to educate clients on their unclaimed property obligations. One major area that must be addressed is knowing a company’s state of incorporation and why that is so important in this arena.
“Generally, unclaimed property is about reuniting money with the owner, but when there is no person to reunite the money with or you don’t have a complete address, it is reported to the holder’s state of incorporation,” said Eric Mauldin, a Principal within Clearview Group’s State & Local Tax (SALT) practice and lead of the Unclaimed Property division. “Right now, states are looking to bring in revenue without raising taxes and enforcing compliance is a great way to do it. Still, each state is a little different. For example, Delaware has very favorable tax laws, which is why so many states become incorporated there. One downside to being incorporated in Delaware is that the state features a very robust audit program; unclaimed property is generally the state’s second largest source of revenue. Other states, like Maryland, have more business -friendly advantages, so it is very important to look at a Company’s state of incorporation and their laws related to audits.”
As a part of preparing for those audits, companies also need to understand how to file a Voluntary Disclosure Agreement (“VDA”), which is where the company comes forward voluntarily prior to an audit to remit its unclaimed property obligations in exchange for state concessions in the form of reduced penalties and potential limitations on the number of years under consideration for outstanding liability. This number of years is called a state’s “lookback period.”
“The lookback period in a VDA or audit is set by the state and determines how far back a company needs to go to determine its liability,” said Mauldin. “It generally varies by state, but in most cases, there is a 10-year lookback plus dormancy period. If there are no records for certain year, then they become estimated years, payable to the company’s state of incorporation. When you look at other SALT areas such as sales & use tax, the lookback period in a VDA or audit may be as little as three years, but unclaimed property can be as long as 15. Clearview Group provides clients with both audit defense and VDA assistance, leveraging the firm’s experience with both states and third-party firms.”
How to Protect From Fraud
Mauldin points out that fraud can also become an issue during the unclaimed property process. There are several internal controls companies must put in place to protect from fraud. To assist with this, Clearview Group helps companies develop formal policies and procedures.
“If one person is controlling the entire unclaimed process and there are no check and balances, the situation can lead to unclaimed property fraud,” Mauldin said. “This is especially true for large companies, which issue thousands of checks and might not have the controls in place for every transaction. We recommend implementing a written document that outlines those controls and separations of duties to make sure one person doesn’t have too many responsibilities. It is also important to make these regulations easy to follow in case of employee turnover. We’ve also seen fraud at the government level, where employees in the claims department reissue checks to friends. This is all due to either corporations or states operating without the proper controls in place.”
To ensure the process stays as streamlined as possible moving forward, Clearview Group will also assist companies with annual unclaimed property reporting, which includes the mailing of due diligence letters, tracking responses and processing state reports.
How Unclaimed Property Can Impact an Acquisition
In addition to ensuring compliance within your current company, Mauldin says unclaimed property can also affect the success of a potential acquisition.
“It is important to analyze how unclaimed property will be transferred in an acquisition — will the liability be transferred to the acquiring company or stay with the current company? Generally, the acquiring company takes on the unclaimed property and responsibility involved,” Mauldin said. “Even if you are in perfect compliance, the company you are acquiring may not have been, which means if you get an audit notice three months after acquisition, you could be responsible. That is why we encourage companies that are thinking of making an acquisition to make sure they understand how the company they are acquiring is currently handling its escheat obligations. Overall, unclaimed property is rarely discussed during acquisitions, but it shouldn’t be swept under the rug as it can come back to impact the bottom line — acquiring companies should even consider negotiating the purchase price based on how well or poorly the entity has historically dealt with its dormant liabilities.
Overall, Mauldin says handling unclaimed property doesn’t have to be difficult for a company, but it is essential to have an expert on board who understands the specific details. “Unclaimed property isn’t hard, it is just very detail-oriented because it can go off the rails very easily,” he said. “Clearview Group has the team in place to provide that expertise and ensure clients avoid all the typical mistakes.”
To view additional educational content regarding Unclaimed Property: