C Corporations

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Unclaimed Property Agenda

• What is unclaimed property?
• Reporting unclaimed property
• Potential exposure
• Audits
• Going forward

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Defining Unclaimed Property

• What is unclaimed property?
• Any outstanding liability on your books and
  records
• Payroll checks
• Vendor checks
• Refund checks
• Expense reimbursement checks
• Credit balances and credit memos

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What is Reportable Property?

• Must meet ALL of the following
• Outstanding liability
• Fixed
• Certain
• A type of property required to be reported
• Has reached its dormancy period
• Holder is unable or not required to locate owner
• No indication of ownership
• Written vs. verbal?

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Reporting Unclaimed Property

• Who is considered the taxpayer that has to
  report the property?
• In unclaimed property holder taxpayer
• Reporting due dates
• Banks and life insurance companies
• Due date May 1
• Dormancy period cutoff December 31
• Everybody else
• Due date November 1
• Dormancy period cutoff June 30

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Reporting Unclaimed Property

• What is dormancy period and how does it work?
• Once property reaches a certain age, it becomes
  dormant
• Dormancy periods in Indiana
• Payroll checks 1 year
• Customer credits 3 years
• Most other property types 5 years

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Reporting Unclaimed Property

• Dormancy period examples
• Example 1
• Payroll check dated April 2, 2008
• Dormancy cutoff June 30, 2009
• Payroll check is at least one year old dormant
• Example 2
• Payroll check dated January 5, 2009
• Dormancy cutoff June 30, 2009
• Payroll check less than one year old not dormant

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Reporting Unclaimed Property

• Due Diligence
• Before dormant property is reported, the holder
  must perform due diligence
• Defined as making a reasonable attempt to
  contact the owner at the owner's address of
  record
• Made between 60-120 days prior to the due date
• Aggregate reporting
• Items less than 50 are not subject to due
  diligence
• Funds for aggregate items must still be reported
• Can be reported as a single line item

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Where is the property reported?

• Determined by the priority rules
• If you have the property owners last known name
  and address, the property is reported to that
  state
• If you do not have a last known name and address,
  property is reported to the holders state of
  incorporation
• Indiana also has a 3rd rule called the
  transaction test
• If the property has no place to go under priority
  rules 1 and 2, the state where the transaction
  occurred is owed the property

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Reporting Exemptions and Exclusions

• Exemptions by property type
• Examples in some states include
• Business to business transactions
• Credit balances
• Stored-value cards and gift certificates
• Payroll

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Why Is Unclaimed Property Reported?

• Started as consumer protection tool
• Individual or company has funds owed to him/her
• Loses track of it
• Holder is not entitled to keep the funds
• Property is reported to the state
• State holds money until rightful owners emerge
• State publishes information to track down owners

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Consumer Protection Theory Benefits

• When this works well
• Dormant bank accounts
• Stocks
• Dividends
• Insurance proceeds
• Deposits
• Types of common payees
• Children
• Deceased

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Consumer Protection Theory Challenges

• Good in theory, but the fact is that the majority
  of reported property goes unrecovered
• Bad addresses
• Bad databases
• Aggregate reporting
• Gaps in recordkeeping
• Revenue generation for states
• Extrapolation for missing periods
• Some property has no name and address
• Who is being protected?

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But.It Is What It Is

• This reporting requirement has been required by
  law for a long time
• All 50 states require unclaimed property reports
  to be filed
• In the end, it is the states that are allowed to
  keep unrecovered funds, not the holder
• The burden of proof is on the holder
• There is no statute of limitations

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Internal vs. External Exposure

• Internal exposure
• Compliance weaknesses that create financial risk
• External exposure
• Factors that make you an audit target
• Perceived exposure vs. real exposure
• Perceived what you think your exposure is
• Real what your exposure actually could be
• Usually a very large gap between the two

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Quantifying Your Internal Exposure

• Potential Trouble Areas
• Live uncashed checks
• Live credit balances
• Uncashed checks or credit balances taken into
  income
• Small balance write-offs
• Unreported liability accounts
• Suspense accounts
• Miscellaneous income accounts
• Voided checks

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Assessing Your External Exposure

• Why is a company selected for audit?
• Company is part of regular audit cycle
• Department of Revenue
• State Board of Accounts
• Department of Workforce Development
• Industry
• Health care
• Retail
• Manufacturing
• Financial institutions
• Size

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Types of Audits

• Types of Audits
• State examinations
• Cross-trained auditors
• Desk examinations
• 3rd Party Auditors
• Work on behalf of many states
• Often paid on a contingency basis
• Can be very aggressive

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Why Unclaimed Property Audits Are Bad

• Long audit periods
• Often use sampling and extrapolation
• Lack of documentation
• Employee turnover
• Burden of proof
• Time constraints
• Contingent-fee audits especially challenging

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What Is Happening in Indiana

• Last 8 years has been heavily focused on
  returning money to owners
• Reporting has fallen off a cliff
• Most companies are not filing any reports
• The companies that are filing are suspected of
  not filing properly

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What Is Happening in Indiana

• Holders Can Pursue Voluntary Compliance
• Assess your current exposure
• Contact the state
• State will waive penalties and interest
• Must agree to file in the future
• Does not matter whether you are under audit with
  any state agency can still participate

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Amnesty Program

• Indiana Is Currently Working on an Amnesty
  Program
• What Other States Have Done
• Do not have to identify identity upfront
• Same look-back period as with voluntary
  disclosure
• Will allow waiver for prior periods under good
  faith clause
• Will waive penalty and interest
• Cannot participate if you have been contacted for
  examination by ANY state agency
• Developed in conjunction with aggressive outreach
  program
• Limited time period
• If you do not participate and are later audited,
  have no control over the process and are assessed
  penalties and interest

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Going Forward

• Assess Your Risk of Being Selected for an Audit
• Quantify Your Possible Finance Exposure
• Consider Voluntary Disclosure
• Identify Ways to Limit Your Financial Risks
• Develop Internal Controls and Policies

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Tim CookKatz, Sapper Miller800 E. 96th
Street, Suite 500Indianapolis, IN
46240317-580-2038 (office)317-201-7398(cell)tco
ok_at_ksmcpa.com