Move on UP: States Employ Third Parties to Increase Unclaimed Property Audits
By Angela Gebert, National Leader, Unclaimed Property
The following article is part one of Marcum’s three-part series discussing must-know aspects of unclaimed property (“UP”) which can lead to eye-watering assessments affecting businesses in every industry.
Unclaimed property—or “UP”—is defined as tangible or intangible property that has been abandoned or lost by its rightful owner for an extended period of time and diverted to the state to be returned.
Common forms of UP include stocks, uncashed/stale dated payroll and dividend checks, insurance payments or refunds, unredeemed accounts receivable credit balances, uncashed/stale dated vendor checks, savings or checking accounts, and, in certain states, gift certificates. A company in possession of UP is known as a “holder.”
UP may make up a significant portion of a state’s budget
States estimate that, on average, anywhere from 65-90% of companies that should be filing UP annual reports fail to do so. This lack of compliance has created a major source of revenue for state authorities that view UP collections as a politically correct alternative to taxes for funding state budgets and programs.
How large you ask?
In total, states are currently holding $50-60 billion worth of unclaimed property, with the state of New York topping the list at $17 billion and California coming in second with over $7 billion.
As a result, states have turned to third-party auditors to execute in-depth audits of businesses to fill current gaps in state budgets left by the recent pandemic. And in Delaware, where about 80% of US companies are incorporated, UP revenue represents the third-highest portion of overall state revenue generated on an annual basis.
That’s a lot of UP—and history has proven that it not be easily returned to its rightful owner.
To help expedite UP return, opportunity-based partnerships have been formed between states and third-party auditors
Most states have a variety of resources and methods to carry out their UP audits, but the quality and quantity needed to carry them out can often be draining on available resources.
This has prompted states to use third-party UP “bounty hunting” firms—an exciting name for auditors in this case—to conduct audits. These auditors are contracted by the state on a contingency or hourly basis, leading many of these firms to pursue each UP audit as aggressively as possible. In many cases, these audit firms have shopped the company’s name out to a multitude of states prior to the first audit notice being sent out. This means that by time the company receives the initial state audit notice, they may have 20 or 30 states joining the audit. As a result, many multi-state or national businesses are often the subject of UP audits.
UP assets are being collected—but how much is being returned?
In 2015, state authorities collected, cumulatively, approximately $7.75 billion worth of UP property and funds.
Out of that collection, states only returned about $3.25 billion to its rightful owner. This ‘breakage rate’ of almost 60% allows states to benefit from the UP collected but not claimed. The undistributed UP is often stored in common general fund accounts that states use for annual budgeting needs.
By now states have gathered an extensive amount of benchmarking data from all the prior audits and compliance reporting
This benchmarking data allows the states/auditors to more accurately target companies suspected of noncompliance or underreporting. Some factors that could lead to a state outreach letter or audit are:
- Lack of filing history
- Not reporting a property type common to that industry
- Inconsistent filing history
But even companies with a consistent filing history could find itself subjected to an audit
Some other factors that may cause the states to audit a company would be:
- State(s) of incorporation
- Industry
- Company’s annual revenues
- Acquisition history
In addition, there may be no statute of limitations to protect UP holders from an excessively long lookback period compared to most tax related filings
This allows UP audit firms to conduct the audit going back more than 10-15 years. In some cases, when the company fails to provide records for the entire audit period, the auditors are allowed to extrapolate or estimate the UP owed based on current years and records and apply those numbers proportionally to the periods in which no records are available. This extrapolation method can be extremely costly to the taxpayers and exceptionally profitable for the states.
Count on Marcum
Due to the high rate of non-compliance associated with UP and the amount of money involved, states and the third-party auditing firms will continue to aggressively pursue UP audits as a means to generate revenue and close budget gaps. Businesses need to be wary of their potential UP profile, and the risks associated with an aggressive audit. Education is the first step in the UP process as most UP exposure lies in the unknown, not the known.
Contact Angela Gebert, National Leader of Unclaimed Property to determine what types of UP your company may have and with what states its obligations may lie – before a bounty-hunting UP firm or state comes knocking.
