Of all the potential reasons to be forced into a restatement of your financials or into a time-consuming audit, the innocuous liability of unclaimed property seems among the more lame. Yet, there it sits on the books of U.S. companies–$50 billion in such items as unreconciled customer credits, unclaimed accounts receivables, uncashed dividends or payroll checks and unused prepaid gift cards–essentially a ticking time bomb that revenue-hungry states on the prowl for new ways to balance their budgets without increasing taxes would love to detonate.


How, you may naively ask? It boils down to a little something called state unclaimed property rights, which allow a state to conduct audits of companies that hold such liabilities. Companies are required to do due diligence and find the rightful owner, points out Mark Paolillo, national director of the unclaimed property services group at Deloitte & Touche LLP. But if they can't locate them, then they're required to report the unclaimed property to the state where the owner last resided. The state then becomes the holder of the property. Failure to file state unclaimed property reports increases the likelihood of an audit. Once that happens, states can aggressively assess interest and penalties for failure to comply. "The possibility exists for a perfect storm: revenue-hungry states, the hiring of contingency-fee audit firms and most importantly, the impact that unclaimed property can have on a company's financial statements," says Robert S. Peters, a partner in tax services in Devon, Pa.-based SMART Business Advisory & Consulting LLC. Okay, so maybe it's a small gale for larger companies, but companies individually can have millions of dollars of exposure.


What can be done to control exposure? Companies first need to establish controls and centralize the reporting function of unclaimed property. "There's generally underreporting. Companies need to continue to monitor their unclaimed property on an annual basis," says Paolillo. "These state audits generally take two to three years, and penalties and interest can be substantial. Plus, there's reputational risk."

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