How does a state determine which companies to audit for unclaimed property?

We contacted Karen Anderson of Abandoned Property Services LLC (APS) for help. Karen offers the following:

The answer really depends upon the state but there are some things that states and their third party auditor contractors considering in selecting a business for audit.

1. Failure to Comply or Inadequate Compliance - Of course, the states are looking for companies that may not be compliant or that may not be compliant with all property types. States like California and Maryland look at state tax records to determine if a company that has been paying taxes is also reporting unclaimed property.

Delaware reviews incorporation records to identify businesses of significant size which incorporated in Delaware but that have not reported unclaimed property. Other states will compare the unclaimed property reporting of a company in a certain industry and of a certain size with a similar company and if the reporting has been vastly different (less money remitted, certain property types omitted from reporting, etc.). If the difference has no obvious explanation they may schedule a company for audit.

2. State Schedule - Consider that some states, like New York have audit schedules for companies within their state and those companies are periodically audited on that schedule.

3. Likelihood of Past Due Property - The second tier of audit selection criteria is directed at businesses that have a higher likelihood of having past due unclaimed property. The criteria include such things as whether a company has undergone a merger or made significant acquisitions.

This criteria may also include the type of industry the business may be in ...for example, states believe that account receivable credits are often not reported or is under-reported. For this reason, companies that may have more accounts receivable transactions that result in credits, i.e., manufacturers, distribution companies, etc. may be targeted for audit.

4. Size of the Organization/Number of Transactions - While this probably falls into the "Likelihood of Past Due Property" category, it warrants separate mention. As larger organizations with several subsidiaries are more likely to have unclaimed property, have some subsidiaries that may not be compliant and are more likely to have more transactions that could cause uncashed checks or unused credits, they are often the targets of audits.

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