Unclaimed property audits, unlike tax audits that businesses are typically more familiar with, present unique challenges that can significantly impact a business’s compliance strategies.
Understanding Unclaimed Property Audits
Unclaimed property refers to assets or funds that have become separated from their rightful owners. Businesses in a variety of industries such as financial services, insurance, retail, and government agencies, often find themselves as custodians of such properties, ranging from uncashed checks to forgotten account balances. The complexity begins when these properties remain unclaimed for a certain period, leading to the involvement of state laws and regulations.
Key Differences between Unclaimed Property and Tax Audits
While both unclaimed property and tax audits aim to ensure compliance, their nature and execution differ significantly:
- Jurisdiction and Administration: UP audits are governed by state laws and often involve multiple states, especially for businesses operating across state lines. In contrast, Tax audits are usually confined to a single state or the federal level.
- Scope and Impact: Unclaimed property audits can span across various departments within a company due to the diverse nature of unclaimed properties. Tax audits, however, typically focus on specific financial aspects.
- Lookback Periods: Unclaimed property audits often have longer lookback periods, sometimes extending up to 15 years, whereas tax audits usually have shorter time frames.
Why Does Understanding the Difference Between Unclaimed Property Audits and Tax Audits Matter?
For businesses, the distinction between unclaimed property and tax audits is a matter of strategic compliance planning. Unclaimed property audits can be more invasive and demanding, requiring extensive records and inter-departmental coordination. The penalties for non-compliance can be severe, including hefty fines and reputational damage.
Executing Unclaimed Property Audits: A State’s Perspective
The execution of unclaimed property audits is a resource-intensive process for states. To manage this, many states have turned to specialized auditing firms. These firms, often referred to as third-party auditors, are hired on a contingency or hourly basis. Their aggressive approach in conducting audits is noteworthy, as they frequently initiate multi-state audits, significantly increasing the scope and complexity for businesses that operate nationally.
Triggers for UP Audits: Identifying Risks
States have become adept at identifying potential noncompliance or underreporting through extensive data analysis from previous audits. Key triggers include:
- Absence of Filing History: A company with no unclaimed property filing history, despite industry trends suggesting otherwise, is likely to attract an audit.
- Inconsistent Filing Patterns: Fluctuations in filing frequency, amounts, or types of reported property can signal potential issues to auditors.
- Industry-Specific Property Types: Not reporting property types that are commonly unclaimed in a particular industry can be a red flag.
- High Transaction Volumes: Companies with numerous transactions due to a large base of vendors, customers, or employees are more prone to unclaimed property errors.
- Mergers and Acquisitions: The unclaimed property filing history of merged or acquired entities, particularly in stock purchases, is closely scrutinized.
- Industry Targeting: Certain industries are more frequently audited due to factors like high volumes and small account credits.
- Cyclical Audits: Companies operating in multiple states may find themselves in a continuous cycle of audits due to state coordination.
The Unclaimed Property Audit Process: What Businesses Can Expect
The unclaimed property audit process varies but typically includes several stages:
- Outreach Letters: These are initial contacts, often reminding businesses of filing deadlines and signaling potential noncompliance.
- Compliance Questionnaires: More detailed than outreach letters, these questionnaires seek information about a company’s unclaimed property policies and practices.
- Self-Audit Requests: Some states may ask businesses to conduct self-audits, overseen by third-party auditors, to assess compliance.
- Voluntary Disclosure Agreements (VDAs): Businesses with overdue unclaimed property can use VDAs to report and potentially reduce penalties and interest.
- Formal Audits: These are comprehensive and can take several years, with auditors requesting extensive data and imposing varying lookback periods.
Navigating the complexities of unclaimed property compliance is critical for businesses. With the potential for extensive audits and the varied triggers that can initiate them, companies must be proactive in their approach to unclaimed property management. Understanding these nuances and preparing accordingly is essential to avoid costly penalties and maintain regulatory compliance.
Contact us at UPCR today to receive a no-cost consultation and see how we can help support you in your unclaimed property compliance efforts.