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Unclaimed Property: Audit Awareness, Mitigating Risks and Litigation Impacts

Jul 11, 2022

By Jon D’Amato

As the states continue to ramp up their enforcement of unclaimed property laws, it is essential that holders understand their compliance obligations and risk profiles, how to proactively mitigate potential exposure and become familiar with the audit process. Failure to respond to state inquiries in a timely manner can increase the likelihood of audit and potentially preclude a holder from participating in a state’s voluntary compliance program in the future.

Are you a potential audit target?

While holders may be audited for any number of reasons, certain factors increase the likelihood of consideration including:

  • No reporting history.
  • First-time filers.
  • Filing reports inconsistently.
  • Gaps in reporting history or missing property types common in the industry.
  • Corporate actions and/or publicity, merger and acquisition activity.
  • Holders with a large customer or vendor base.
  • Holders with a large employee base.

Be prepared by being proactive

Filing timely reports and monitoring legislative and regulatory activity for changes facilitates holder compliance, but holders may also consider performing an internal risk assessment to boost compliance efforts and further reduce audit risk. Actions you can take to perform an internal risk assessment may include:

  • Assessing each line of business to ensure all sources of unclaimed property are properly accounted for.
  • Ensuring the priority rules are properly followed. For example, filing everything in the state you are doing business in, as opposed to the last known address of the property owner, may result in non-compliance.
  • Testing policies and procedures surrounding the unclaimed property process.
  • Proactively addressing areas of exposure or gaps in compliance.
  • Evaluating internal accounting procedures.
  • Reviewing contracts with third-party administrators.
  • Reviewing the tracking, documentation and retention of customer/owner activity and undeliverable mail.
  • Understanding your company’s record retention period, along with the availability and researchability of records, as retention periods under unclaimed property laws can be significant (e.g., 15 years). Documentation should be sufficient to rebut the state’s presumption that an item identified as unclaimed property is “due and payable” to an owner.
  • Proactively remediating accounts through early owner outreach and considering voluntary compliance programs in states where a significant liability is found.

The audit process

Whether the state performs the audit or is assisted by a third-party audit firm (which may be paid on a contingency fee basis), audits can take years to complete and can be a substantial drain on internal resources. In lieu of an audit, the states may send self-audit letters, questionnaires or other correspondence that requires the holder to act within a brief period of time and can be equally time-consuming. Here are a few recommendations to assist holders in the process:

  • Review internal processes to help identify where unclaimed property may be generated within your organization to potentially limit the scope of the audit.
  • Negotiate a nondisclosure agreement, where possible, prior to responding to record requests, to protect the security and confidentiality of your data.
  • Seek to narrow unduly burdensome record requests.
  • Be prepared to provide sufficient documentation to prove items are not truly “due and payable” and were properly resolved.
  • Apply available exemptions and remediation efforts to reduce the population of accounts.
  • Obtain a closing or settlement agreement, if available, that documents the auditor’s findings (and support for those findings) and a release of liability for the entities, periods and property types covered in the audit.

You can learn more about unclaimed property and how to mitigate the risks of an audit and/or litigation at AFP 2022 by attending the session led by Jon D’Amato, managing partner and Unclaimed Property Practice leader. Check out the full line-up of sessions with the AFP 2022 Session Explorer.