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Unclaimed Property Expert Talks Audit Trends

Tim Shaw  

· 6 minute read

Tim Shaw  

· 6 minute read

Correction, 7/11/2024: This article has been updated with a corrected quote in paragraph four regarding bank and insurance company audits.

Cathleen Bucholtz, tax principal with Baker Tilly’s unclaimed property practice, spoke with Checkpoint about how unclaimed property compliance has evolved over time, what to expect at audit, and record-keeping best practices.

Generally, unclaimed (or ‘abandoned’) property refers to tangible or intangible assets of which a state government takes ownership after a “dormancy” period. Property is escheated when the owner cannot be identified or reached. Examples of unclaimed property include bank accounts, uncashed checks, stocks and dividends, and cash.

Importantly, unclaimed property is “not a tax,” said Bucholtz, who used to work in the sales and use tax arena. But it “walks and talks like a tax” and comes with state filing obligations, she clarified.

Holders of unclaimed property are responsible for reporting pursuant to state law. Failure to do so may lead to an audit and/or penalties. Yet unclaimed property enforcement has only become an area of emphasis for states relatively recently, according to Bucholtz, and is much more relevant for taxpayers today. In the late 1990s, she explained, state involuntary audits were mostly limited to banks and insurance companies “because everybody understood that bank accounts and insurance policies were not the property of the bank or the insurance company.” (emphasis added; see correction notice)

The “real change” started in the early 2000s when states realized there were opportunities to pursue additional revenue sources, she added. States learned that oftentimes, no one claims the property which can go into a state’s general fund. Contingency fee auditors who could perform audits for multiple states simultaneously become more commonplace.

“It made it so that the states didn’t have to employ their own auditors,” said Bucholtz. “They could go through the contingency fee auditors to conduct a wide variety of audits in many new industries that they hadn’t pursued previously.”

Common areas of focus for unclaimed property audits are accounts payable, payroll, and accounts receivable, she explained, since auditors look at what is on the books and “what has been written off.” The lookback period can go back as far as 10-15 years, which is “what causes so much angst for companies.”

Bucholtz said unclaimed property checks can be erroneously voided because personnel in accounting departments may not realize the old checks are actually unclaimed property. Untrained staff may not “understand the ramifications,” she said. Unclaimed property arises in various forms across different industries. Hospitals, for instance, carry patient credit balances. The oil and gas industries, she continued, can have royalty payment accounts that go into suspense.

Companies may be audited for a number of reasons, according to Bucholtz, but it is “not normal that at the onset of an audit” the auditors know exactly what to look for and can tell a company what is missing. A larger company that makes multiple acquisitions can be liable to have their new subsidiaries’ books examined. Conversely, smaller companies “don’t understand unclaimed property” as well as their Fortune 1000 counterparts, said Bucholtz, and may not ever submit required filings. Some audits may cross-reference state tax filings.

Not reporting unclaimed property at all or suddenly beginning to file out of the blue could put a company at a higher risk of audit, she warned. Whatever the reason an audit is initiated, Bucholtz concluded, the takeaway is: there is “a lot of noncompliance” in the middle market.

She tells clients selected for audit to prepare for a four- or five-year process, on average. Two years would be a “fast” turnaround time, but she has seen some last over a decade. Bucholtz said many companies do not have records going back 10 or 15 years and states may need to “perform estimates for periods where records don’t exist.”

Most states have fall reporting deadlines but there are exceptions. Texas and Michigan have a July 1 report due date. California has a unique two-step process starting with a Notice Report due in November. The following summer, holders submit a Remit Report, which is when payments are made. For the majority of states with fall reporting, Bucholtz recommends that companies notify employees, vendors, and customers of potential unclaimed funds or assets by the end of August as part of their due diligence mailing.

Some states have voluntary compliance programs to entice non-filers with penalty abatement. Others offer a de minimis reporting exemption or tax deductions. Because state laws vary, holders should be aware of potential benefits available to them. Bucholtz cited California’s unclaimed property Voluntary Compliance (VCP) program that went into effect in 2023 and shields approved applicants from penalties and the 12% per-annum interest rate on unreported property. Before the VCP, the lack of protection from these assessments “made it difficult for anybody to come forward and report.”

To qualify for the California VCP, a taxpayer must not currently be under an audit or have any outstanding interest or penalties. “Once a company is in, they’re given anywhere from six to not more than 18 months to complete the process,” which includes mandatory training. A company may file the Notice and Remit reports “off-cycle” the first time, but a holder can only go through the program once every five years.

Bucholtz said there was initial skepticism since the program does not make any guarantees that enrollees will not be audited. The state needed to assure holders that the VCP is not an “audit campaign” and applying will not automatically trigger an audit. To that end, though, she suggests California holders do not apply until they are ready.

Offering advice to holders in all states, Bucholtz suggested companies take a centralized approach with tracking unclaimed property. In her experience, she often sees companies with siloed departments operating too independently of each other. The organization as a whole should be bought in to the importance of unclaimed property compliance rules, she urged.

Reporting should be done by the tax department “even if the data is coming from multiple parts of the company,” she recommended. Data collection policies and procedures should be put in place. This involves “following up on aged checks or credits — not necessarily waiting until they’re dormant,” said Bucholtz, “so that if you have turnover in a given department, it’s not going to get lost in the shuffle.”


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