This document provides an overview of abandoned/unclaimed property (AUP) laws and audits. It notes that while every business holds some amount of AUP, few are fully compliant with reporting requirements. Audits can reach back 15+ years in most states. Contingent fee auditors are aggressively pursuing assessments, sometimes extrapolating small errors over long periods to arrive at large estimates. The document outlines common AUP types and risks, as well as strategies to mitigate exposure such as enhancing compliance, reducing exposure periods, and considering a voluntary disclosure agreement.

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Abandoned/Unclaimed Property
Presented by
Marshal Kline, Managing Director, CBIZ MHM
Email: mkline@cbiz.com | Phone: (864) 241-0455
linkedin.com/in/pub/marshal-kline/6/a35/259

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 Every business creates and/or holds AUP
 Few businesses appropriately report and/or remediate AUP
(“. . . It is estimated that less than 25% of companies in U.S. are in full compliance “ –
Accounting Today 6/1/2011)
 Audit exposure exists for 15+ years in most states
(30+ years in Delaware)
 It’s easy to acquire AUP through M&A
(asset deals are not immune)
 AUP represents a significant revenue source for many states
and lately it’s become a very aggressive audit area
*AUP is often a material “unknown” exposure for many companies
Introduction to AUP: Why It Matters

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Committees/Task Forces
- Delaware Unclaimed Property Task Force - Uniform Law Commission
- Michigan Chamber Tax & Regulatory Reform - U.S. Chamber Institute for Legal Reform
- Michigan Chamber Tax Policy Committee - COST Unclaimed Property Committee
2014 Legislation (Enacted/Pending)
- Delaware Senate Bill 228 enacted - Illinois House Bill 4242 pending
- Delaware Senate Bill 215 considered but not advanced - Louisiana House Bill 411 pending
- Michigan House Bill 4289 enacted - Maryland Senate Bill 690/House Bill 797 pending
- Illinois Senate Bill 1988 enacted - Massachusetts House Bill 20 pending
- Georgia House Bill 920 enacted - Michigan House Bill 4703 pending
- Iowa Senate Bill 2342 enacted - Oklahoma House Bill 3287 pending
- Iowa House Bill 2296 enacted - Pennsylvania House Bill 1937pending
- Indiana Senate Bill 220 enacted - West Virginia Senate Bill 263 pending
- Indiana Senate Bill 208 enacted
- Mississippi Senate Bill 2796 enacted
- Missouri House Bill 1075 enacted
- Pennsylvania Senate Bill 278
- Rhode Island House Bill 7031/Senate Bill 2308 enacted
- Tennessee Senate Bill 2516 enacted
It’s on the States’ Agenda

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10/01/2014 – Sent to the Delaware Unclaimed Property Task Force
 Of all audits currently underway, at least half have been open for 3
years or more
 Of all audits completed, 100% took more than 3 years
 All respondents estimated that the cost to them in conducting the
audit (not including any resulting assessments) would exceed
$100,000. In fact, more than half responded that the cost would be
over $1,000,000.
*Full survey downloadable here:
http://www.cost.org/WorkArea/DownloadAsset.aspx?id=88319
Lately in the News – COST Survey

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 “Audit length and volume of data were both excessive. In excess of 20,000 hard copy
pages and many electronic files were provided. More than 3,700 man hours
of internal resources were needed to respond to audit requests.”
 “I have no idea who our “DE Audit Supervisor” is – that has never
been conveyed to us. The letter came from Mark Udinski, and we’ve had calls that
included Mark (before he joined Kelmar) ranting and threatening. . . VERY
unprofessional. . . and a DE attorney (didn’t rant, but did threaten – he’s been
‘waiting for an opportunity to take this to court’).
*Full survey downloadable here:
http://www.cost.org/WorkArea/DownloadAsset.aspx?id=88319
Lately in the News – COST Survey

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 “My company has had an unclaimed property policy in place for decades, and we
have reported to all states for decades. . . But from the beginning of this exam, the
approach is that we don’t comply and we’re hiding that non-compliance somehow.
We may not comply 100%, but we should be close. It still won’t matter – we don’t
have returns that go back to 1986 and we won’t receive any credit for those filings,
not really . . . Having NO IDEA of what our assessment may be
hangs over my area - it won’t be pretty when it arrives, and it
won’t result in many, if any, owners receiving their funds.
*Full survey downloadable here:
http://www.cost.org/WorkArea/DownloadAsset.aspx?id=88319
Lately in the News – COST Survey

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 In 2012, International Paper, Inc. acquired Temple-Inland, Inc.,
a company headquartered in TN but incorporated in DE – it
faced an AUP audit going back to 1981
 Its only reported error was failing to report a single uncashed
payroll check worth $147.30
 Third-party auditor Kelmar Associates LLC has assessed the
company’s “extrapolated” liability at nearly $1.4 million
 Company has been forced into litigation despite a strong
history of compliance
*Temple-Inland, Inc. v. Cook, No. 1:L14-CV-00654-SLR (D. Del. 5/21/2014), complaint filed.
Temple-Inland Case*

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AUP: Generally “intangible” property that has not been claimed by its
rightful owners after a certain period of time has lapsed
Holder: Person or business in possession of property belonging to another
(or obligated to pay/deliver)
Owner: Person or business with legal right to property held by another
Dormancy Period: State-by-state defined period of time for each property
type during which there has been no owner directed activity
Due Diligence: State-by-state defined efforts required from Holders to locate
owners and reunite them with held AUP before turning over to the state
Common Terms and Definitions

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Snapshot of the AUP Reporting/Remediation Process
HOLDER OF AUP
 uncashed payroll
 customer credits/rebates
 gift cards (unredeemed
portion)
AUP OWNERS
 former employees
 customers
 vendors
 shareholders
STATE CUSTODIAN
Holds collected AUP with
intent to reunite with
owner.
-Annual compliance
-Audit assessment
-VDA reporting
$
$ $
www.naupa.org >> reporting
www.missingmoney.com
*Be sure you are compliant FIRST!

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STATE
CONTINGENT
FEE AUDITOR
Other State
Other State
Other State
Assess AUP/penalties/interest
Estimate AUP for years with no data
Perform remediation (maybe)
Match to last known address/confirm no address
Identify potential AUP
Review available data (3-5 years)
Engage
Solicit
Engage
Snapshot of Contingent Fee Audits

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 1st Priority Rule
– State of owner’s last known
address
 2nd Priority Rule
– If identified property cannot be
matched with a last known
address
– State of incorporation
Priority Rules – To Which State is AUP Reported?

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Uniform Unclaimed Property Act (1995), Section 4. Rules For Taking
Custody, Paragraph (6) the transaction out of which the
property arose occurred in this State, the holder is domiciled
in a State that does not provide for the escheat or custodial taking of
the property, and the last known address of the apparent owner or
other person entitled to the property is unknown or is in a State that
does not provide for the escheat or custodial taking of the property;
What About the 3rd Priority Rule?

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Taxpayer is incorporated in Delaware, has its headquarters
in Kansas and does business in approximately 25 states.
Year Sales
AUP with
DE Address
Extrapolated AUP
Sourced to Delaware
Total Delaware
Assessment
2012 75,000,000 1,850
Use
Actual
Data
1,850
2011 70,000,000 1,250 1,250
2010 68,000,000 1,000 1,000
2009 67,500,000 2,250 2,250
2008 66,500,000 1,150 1,150
Actual 347,000,000 7,500 7,500
Error Rate Calculation: 0.0021613833%
Example of the Impact of Extrapolation

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Year Sales
AUP in
All States
AUP with
DE Address
Extrapolated AUP
Sourced to Delaware
Total Delaware
Assessment
2012 75,000,000 46,250 1,850
Use
Actual
Data
1,850
2011 70,000,000 31,250 1,250 1,250
2010 68,000,000 25,000 1,000 1,000
2009 67,500,000 56,250 2,250 2,250
2008 66,500,000 28,750 1,150 1,150
Actual 347,000,000 187,500 7,500 7,500
Error Rate Calculation: 0.054034582% 0.0021613833%
Example of the Impact of Extrapolation
Continued

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Year Sales
AUP in
All States
AUP with
DE Address
Extrapolated
AUP Sourced
to Delaware
Total
Delaware
Assessment
2012 75,000,000 46,250 1,850 1,850
2011 70,000,000 31,250 1,250 1,250
2010 68,000,000 25,000 1,000 1,000
2009 67,500,000 56,250 2,250 2,250
2008 66,500,000 28,750 1,150 1,150
Actual 347,000,000 187,500 7,500 7,500
Error Rate Calculation: 0.054034582% 0.0021613833%
2007 73,500,000 39,715 39,715
2006 68,000,000 36,744 36,744
2005 66,000,000 35,663 35,663
2004 64,500,000 34,852 34,852
2003 63,000,000 34,042 34,042
2002 61,500,000 33,231 33,231
2001 64,000,000 34,582 34,582
2000 63,500,000 34,312 34,312
1999 60,500,000 32,691 32,691
1998 57,000,000 30,800 30,800
1997 55,000,000 29,719 29,719
1996 51,000,000 27,558 27,558
1995 50,500,000 27,287 27,287
1994 52,000,000 28,098 28,098
1993 49,500,000 26,747 26,747
1992 47,500,000 25,666 25,666
1991 46,000,000 24,856 24,856
1990 42,500,000 22,965 22,965
1989 40,000,000 21,614 21,614
1988 39,000,000 21,073 21,073
1987 38,500,000 20,803 20,803
1986 38,500,000 20,803 20,803
1985 36,000,000 19,452 19,452
1984 34,500,000 18,642 18,642
1983 34,000,000 18,372 18,372
1982 28,500,000 15,400 15,400
1981 26,500,000 14,319 14,319
Estimated 1,351,000,000 730,007 730,007
Application of Penalties and Interest 921,884
Total Delaware Assessment 1,659,391
Use
Actual
Data
DocumentsUnavailable
DocumentsUnavailable
Example of the Impact of Extrapolation
Continued

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2008 – 2012 (actual DE property – 1st Priority) $ 7,500
1981 – 2007 (estimated liability – 2nd Priority) 730,007
Penalties & Interest 921,884
Proposed Audit Assessment 1,659,391
Summary of Example Assessment

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$
AUP OWNERS
%
Contingent
Fee Auditors
STATE CUSTODIAN
Holds collected AUP
with intent to reunite
with owner.
$
Many owners are never found and
amounts assessed based on estimates or
“extrapolations” can never be matched to
an owner. Therefore, these amounts
remain with the state (reported to be
over 90% in DE).
Results of a Contingent Fee Audit

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15+ Years
2nd Priority Rule
Contingent Fee Auditors
MATERIAL EXPOSURE
(often unidentified)
(i.e., extrapolation)
Summary of the Problem: Add It Up

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 Uncashed vendor checks
 Uncashed payroll checks
 Accounts receivable credits on account
 Deposits on account
 Customer rebate programs
 Gift cards
 Dividend payments
 Securities
 Safe deposit box contents
 Inactive bank accounts
 Unclaimed insurance proceeds
Common Property Types

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Construing the State Contractual “Anti-Limitations” Provisions . . .
*State Tax Notes, 66 STN 417 (11/5/12).
Contractual Anti-Limitations
State contractual anti-limitations provisions first arose in connection with the drafting of the
Uniform Unclaimed Property Act of 1981 (the 1981 Act). In particular, Section 29(a) of the 1981
Act provides that:
The expiration, before or after the effective date of this Act, of any period of time
specified by contract, statute, or court order, during which a claim for money or
property can be made or during which an action or proceeding may be commenced or
enforced to obtain payment of a claim for money or to recover property, does not
prevent the money or property from being presumed abandoned or affect any
duty to file a report or to pay or deliver abandoned property to the administrator as
required by this Act.
The comment to section 29(a) of the 1981 Act further states that the contractual anti-
limitations provision was designed so that “the expiration of time periods set forth in
contracts will not prevent the property from becoming reportable.”

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 Recent mergers/acquisitions
 Changes in accounting systems
 Less than 15 years record retention policy
 Possible P&L clean-ups (e.g., miscellaneous income write-offs)
 Business model not conducive to maintaining owner addresses
(e.g., gift cards)
 Large credit balances in “target” accounts (e.g., A/R, customer
deposits, accrued rebates, etc.)
 Not filing with your state of incorporation, or anywhere else
 Disgruntled employees (potential whistleblowers)
Common Indicators of Risk

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 Don’t let an audit happen
– Get compliant
– Prepare “Audit Defense” book
– Consider VDA
 Reduce risk/exposure
– Enhance record retention
– Evaluate/modify accounting policies and procedures
– Reduce/eliminate the extrapolation numerator (self
remediate)
Keys to Exposure Mitigation

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and
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President, CBIZ Insurance Services, Mid-Atlantic