Article

The 5 Ws of unclaimed property record retention

Feb. 3, 2023

Anyone following the latest blogs and articles about unclaimed property cannot help but notice the doomsday tidings of more audits on the horizon. While this is nothing new, states need money and are looking to unclaimed property to fortify their revenue deficits.

As the risk of audits increase, corporations should continue to take proactive steps to prepare for the day that they receive unclaimed property audit notices. The following points dive into the details of record retention, which may be the most important element in preparing for an audit, second only to proper annual reporting. Implementing the following “Five Ws” in your record retention policies and practices will help to mitigate much of the heavy lifting, resource challenges and protracted duration of a typical unclaimed property audit.

Who, what, when, where and why of unclaimed property record retention

1. WHO should have oversight over the record retention responsibilities related to unclaimed property?

• The individual who oversees the reporting process should also oversee and work with the various departments that are reporting unclaimed property items to ensure that each department’s source documents are properly archived (e.g., bank records, aging reports, etc.)
• The IT department must be involved to create an archive that will not be purged based on the company’s general record retention policies. These records should ideally be kept indefinitely, but if that is not practical, then they should be kept no less than 15 years.
• The CFO, CIO, tax directors, and internal legal team or similar-level personnel should be made aware of this extended retention requirement in order to obtain the needed approvals and resources to create a dedicated, permanent unclaimed property compliance archive in the company’s internal record retention policies.

2. WHAT should be archived to support that an aged liability was properly resolved? Keep in mind that internal system notes alone are generally not regarded as sufficient proof that a liability was extinguished. The following are examples of remediation support that would be sufficient to support that a liability was resolved:

• Unclaimed property filing history that includes detailed records of line items reported as well as proof of remittances made to the jurisdictions (e.g., bank statements). This should also include due diligence letters that have been returned by addressees indicating that amounts are not owed.
• Bank statements and reconciliations for both open and closed bank accounts, including check registers, outstanding and voided check lists, and ACH payments and refunds. Records should include monthly or quarterly bank statements that can support checks issued and cleared in addition to completed ACH transfers.
• Accounts receivable aging reports and documents to support that aged credits have been utilized or refunded. For example, if a credit memo was issued for an aged credit balance or returned products, archive copies of the invoices and sufficient customer account detail showing the credit memo was applied to the customer account should be retained. Likewise, if a refund check was issued to clear the aged credit balance, bank statements would be needed to support that the refund check was cashed.
• Merger and acquisition history and purchase agreements. If an acquisition was an asset purchase, purchase agreements addressing specific included and excluded assets should be archived.
• Other support documents include, but may not be limited to, trial balances, charts of accounts, policies and procedures related to uncashed checks, voided check processes, and aged credit balances, unclaimed property policies and procedures and any other documents that relate to the resolution of aged liabilities that could result in unclaimed property if not resolved.
• A company should also maintain access to legacy or predecessor enterprise resource planning (ERP) systems if the acquisition/ERP change occurred within the last 15 years and if the system contains documents that could support resolution of aged liabilities.

3. WHEN should these documents be archived? The easiest time to save a document is when you access the documents while performing standard duties, such as month-end or quarter closings or when you reconcile bank statements.

• When reconciling bank accounts, copies of the bank statement, reconciliations and other related documents should be copied to the unclaimed property compliance archive folder.
• When you run trial balances or accounts receivable aging to identify various transactions, copies of the accounting cycle reports should be saved in the unclaimed property compliance archive.
• The longer you wait to copy and archive a document after it has been referenced during an accounting cycle, the harder it will be later to remember to locate and save specific documents.
• Delay also increases the risk that the document(s) could be lost through the company’s document retention/purge process.

4. WHERE should records be archived to ensure you have access for a minimum of 15 years?

• It is best to establish a permanent or long-term unclaimed property compliance archive folder that will not be purged as part of your company’s record retention purging process.
• If your ERP has annual blanket purges, you should work with your IT group to determine where the permanent folder should be maintained.
• If your IT group cannot carve out a specific location in the ERP system, then another location in the company’s internal computer network should be created, and a policy added to the company’s retention program regarding the archive.
• Each department that participates in the annual unclaimed property reporting process can maintain its own archive. At the end of each report year, the various archives should be saved to a single long-term or permanent unclaimed property compliance archive folder with specific subfolders related to the specific unclaimed property report year (e.g., “2020 unclaimed property report year unclaimed property compliance permanent archive”).

5. WHY all the effort? Remember, the best defense under audit is having adequate documentation to verify that an aged liability was exhausted.

• System notes must be supported by other external documents such as bank records, invoices and credit memos. In the absence of such documents, your company’s state of incorporation may audit per their standard look-back period and estimate for periods where records are not available.
• Estimations may result in exposure assessments that favor the state. While many courts have ruled in favor of companies that claimed audit estimations were, in fact, biased and or flawed, most audit assessments do not warrant an expensive and drawn-out litigation process.
• Proper and timely archiving of documentation, occurring contemporaneously throughout the year, is the best option to defend your company under audit. In addition, responding to document requests is where most audits stall, as companies expend resources combing through years of records and millions of transactions. Having an audit-ready archive can significantly reduce the duration of an audit.

In today’s aggressive unclaimed property audit environment, conducting proper reporting, implementing robust unclaimed property policies, training your team or using professional advocates is not enough to defend your company once an audit begins. While each of these are solid best practice approaches, once an audit occurs, your best defense is adequate records to support the remediation of aged transactions such that they are ultimately determined not to be unclaimed property.

Please do not hesitate to reach out to any member of the Baker Tilly unclaimed property management team if you have any questions about record retention or any other UP concerns that may impact your company.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.