It is no secret that states need money, and many are turning to unclaimed property audits to get it. These audits are low-hanging fruit as they cost the states little to administer because many third-party audit firms work on a 10%-12% contingency arrangement, which can produce fees in the tens of millions of dollars. The only real losers here are the companies placed under audit. Unclaimed property audits frequently are demanding and aggressive.

So, assuming a company has been able to dodge the unclaimed property bullet so far, here are some “red flags” that may increase the risk of a third-party unclaimed property audit. 

  1. Everybody Knows Your Name: A Sutherland lawyer was once on a bus at a conference with a bunch of state unclaimed property administrators, and as the bus passed a famous landmark with a large company’s name on it, the administrators started asking whether that company had been audited yet! A large company with a well-known name or a manufacturer of a common household product is or will be on an audit list. 
  2. People Come, People Go:  Companies with a transient work force or a significant number of employees who are paid hourly are often targets. This is one of many reasons why retail is a favorite target. There tends to be a great deal of turnover, which may lead to unclaimed property issues associated with uncashed payroll checks. Employees who are paid hourly tend to have significantly more “reissued” checks because of errors with hours, vacation time accrued, double-time, lost checks, etc. Due to the potential replication of these types of errors, the amount of unclaimed property exposure can be substantial. 
  3. It Is So Obvious: Another common red flag for audits is if “obvious” property types are missing from a report.  Based on a company’s particular industry, there are certain property types that are expected to be reported. For example, a health care provider should always have some patient credit balances to report as unclaimed property and excluding them will serve as an indication that the provider is not compliant. Spending a few minutes to brainstorm the types of industry-specific unclaimed property issues a company should be reporting (and comparing those categories to what is reported) could stave off a thorny unclaimed property audit.
  4. Nothing In This World Is Free:  Before claiming unclaimed property from a state, consider whether the company is (or should be) reporting unclaimed property to the state. Sutherland lawyers have received several calls from companies’ personnel excited to have found unclaimed property being held by a state only to realize that the same company is not in compliance with the state.  
  5. You Are Being Watched:  States benchmark unclaimed property reports and audit the results of various industries.  As a result, if a state notes that a particular company within a specific industry is remitting significantly less than other companies in the same industry, an audit is likely. States also tend to “move” through certain industries. For example, about three years ago, oil and gas companies were audit targets. Currently, insurance companies are under attack, and a wave of audits are underway.
  6. Your State of Incorporation Is (Almost) Everything:  Under the jurisdictional rules of unclaimed property, if the last known address of a payee  is unknown or incomplete, the property is reportable to the holder’s (company’s) state of incorporation. Since the majority of public companies are incorporated in Delaware, well…we think you get the idea. Many companies are considering Delaware’s and other states’ unclaimed property laws (and the aggressiveness of those states’ audit practices) when considering incorporating new or existing businesses. 
  7. If You Have Nothing to Say, Don’t Say Anything:  One of the biggest and most obvious audit triggers is underreporting unclaimed property when it is obvious that the company has more significant unclaimed property owing to the state. Many companies decide they need to “get in compliance” so they just file negative or zero reports with all the states. After all, “There is no way people don’t cash their checks!” (If Sutherland had a dime for every time a business unit manager said this, Sutherland would have a lot of dimes). Taking this route routinely produces an unclaimed property audit. 

Last Words: A study published in the Medical Journal of Australia on December 16, 2009, reported that on a pain scale of 1 to 10 (with 10 the “worst pain imaginable”), students who had a bandage ripped of their arms quickly had an average pain score of 0.92 while those who had the bandage removed slowly experienced an average rating of 1.58. Coming into compliance with unclaimed property laws may result in much higher average pain scales than having a bandage ripped off an arm, but coming into compliance quickly (through comprehensive internal audits and voluntary disclosure agreements) will still be less painful than taking the slow approach (waiting for state audits). All states, with the exception of California, allow companies to enter into some type of voluntary disclosure agreement, which reduces or eliminates penalties and interest, and shortens the “look-back” period.