What’s the future of unclaimed property?

As Albert Einstein once said, “If you want to know the future, look at the past,” an old adage that can be applied to recognizing trends in the current and future state of unclaimed property. Many pundits today agree that we seem to be entering a period of economic uncertainty. What we can determine from looking at the past is that when the economy and state tax collections begin to decrease, state unclaimed property enforcement actions tend to increase.

The new millennium

In the late 1990s, the economy was thriving. However, by the early 2000s, the nation faced a weak job market, the March 2000 NASDAQ crash following the dot-com bubble collapse, and a series of successive interest rate increases by the Federal Reserve from 2000 to 2001. The resulting economic downturn coincided with an avalanche of states offering unclaimed property amnesty programs, allowing companies to report and remit past-due property to the states without the assessment of interest and penalties. In fact, for many companies, this was the first they heard about that new “tax” called unclaimed property.

Although unclaimed property audits had long been conducted in the securities and banking sectors, this period marked the beginning of increased general ledger unclaimed property audits and the use of estimation techniques to calculate owner-unknown property, typically claimed by the holder’s state of incorporation. This era also saw the rise of the third-party contingent fee auditors conducting unclaimed property examinations on behalf of multiple jurisdictions.

The Great Recession

From the turn of the millennium to the Great Recession, the world of unclaimed property was adjusting to a new normal: multi-state audits run by third-party contingent fee auditors, estimations for periods without complete records and more frequent state enforcement actions. Beginning in 2008, companies faced more aggressive audits and an increased use of third-party contingent-fee auditors working for the states. Additionally, this period saw increased litigation, both from states enforcing their laws and from holders challenging what they viewed as large, unfair and often arbitrary liability assessments, especially those involving estimations for periods with incomplete or unsearchable records.

Today ... and tomorrow

As we head into a period of economic uncertainty, the unclaimed property climate also appears to be in transition. Some recent developments have been positive for companies, including the launch of California’s Voluntary Compliance Program, which allows companies to report past-due unclaimed property without interest or penalties. However, we continue to see a surge in third-party auditors working for the states and growing litigation involving companies under audit. There is also a sharp rise in new enforcement methods, including verified report reviews, voluntary disclosure invitations and self-audit questionnaires, mostly from smaller states who are casting a much wider net to encourage compliance from smaller and smaller organizations.

Your best defense

As state revenues decline, expect to see a continued uptick in unclaimed property reviews and more aggressive state positions during audits and report verifications to boost unclaimed property reporting and revenue. What should your company do to prepare?

1. If your company has been filing regularly, continue to do so, and stay informed on the latest law changes impacting state unclaimed property reporting requirements.
2. If your company is not in compliance with all states in which it may have a reporting obligation, conduct a thorough review of all areas of potential exposure BEFORE reporting to the states. First-time filers are often under increased scrutiny, and incomplete initial reports can trigger state inquiries or audit notices.
3. Evaluate state voluntary disclosure programs to see if they are right for your company. Most of these programs offer waivers of interest and penalties for companies that complete the process.
4. Stay alert for communications from the states. This includes reporting follow-up requests, verified report notices and invitations to participate in voluntary compliance programs. Failure to respond promptly can lead to penalties or even an audit notice.

To learn more about how to respond if your company is contacted by a state, or for other unclaimed property questions, reach out to a Baker Tilly unclaimed property specialist for guidance and assistance.

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.