Unclaimed Property Audit Strategies Sharpening Compliance and Planning as States Aggressively Pursue Additional Revenue

Transcription

1 Presenting a live 110 minute teleconference with interactive Q&A Unclaimed Property Audit Strategies Sharpening Compliance and Planning as States Aggressively Pursue Additional Revenue THURSDAY, FEBRUARY 3, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Robert Peters, Managing Director, Tax Services, Duff and Phelps, Chicago Tracey Reid, President, Reid Unclaimed Property Services, Fort Mitchell, Ky. Robert Tucci, Director, Unclaimed Property Practice, True Partners Consulting, Plano, Texas Chris Hopkins, Partner, Crowe Horwath, New York For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

2 Continuing Education Credits FOR LIVE EVENT ONLY Attendees must listen to the audio over the telephone. Attendees can still view the presentation slides online but there is no online audio for this program. Please refer to the instructions ed to the registrant for additional information. If you have any questions, please contact Customer Service at ext. 10.

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4 Unclaimed Property Audit Strategies t Webinar Feb. 3, 2011 Chris Hopkins, Crowe Horwath chris.hopkins@crowehorwath.com Robert Peters, Duff & Phelps robert.peters@duffandphelps.com Tracey Reid, Reid Unclaimed Property Services treid@reidunclaimed.com Robert Tucci, True Partners Consulting robert.tucci@tpctax.com

5 Today s Program Taxes Vs. Unclaimed Property [Chris Hopkins] State Policing Of Unclaimed Property [Robert Peters] Slide 6 Slide 13 Slide 14 Slide 19 State Vs. Third-Party Auditors Slide 20 Slide 26 [Tracey Reid] Potential Audit Triggers Slide 27 Slide 35 [Robert Tucci] Audit Preparation Tactics Slide 36 Slide 43 [Tracey Reid and Chris Hopkins] Best Practices During The Audit Slide 44 Slide 48 [Robert Peters] Into The Future Slide 49 Slide 52 [Chris Hopkins]

6 Chris Hopkins, Crowe Horwath TAXES VS. UNCLAIMED PROPERTY

7 The Unique Alternative to the Big Four Unclaimed property p is not a tax! Tax Vs. Escheat Abandoned/unclaimed property is a liability under state succession laws relating to property rights. However a number of states use the enforcement of their escheat laws as a means to raise revenue. Equitable apportionment? What s that?! Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 7

8 The Unique Alternative to the Big Four Tax Vs. Escheat: Tax Nexus Rules May Not Apply Nexus under Commerce Clause and Due Process Clause Again, not a tax Litigation? Who is the holder? Federal preemption National banks Bankruptcy ERISA Interstate transportation Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 8

9 The Unique Alternative to the Big Four Tax Vs. Escheat: Statutes Of Limitations And Lookback 1981 and 1995 model acts 10 report years Certain states arguably have no statutes of limitations, even if reports have been filed. See, for example, Texas Prop. Code Delaware Three years from the date the report was filed, or six years for an understatement of more than 25% (12 Del. C. 1158) This act shall be effective for reports filed or required to be filed on or after July 22, (Sect. 6 of Del. Laws, c. 417) No statute of limitations for earlier period reports? See verified complaint, Staples, Inc. v. Cook, Del. Ch. C.A. No VCS (Apr. 30, 2010) Audit lookback period for states may be arbitrary. Delaware: Transactions beginning in 1981 (25 report years) Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 9

10 The Unique Alternative to the Big Four Tax Vs. Escheat: Audits And Appeals Vast majority of unclaimed property audits are performed by contract audit firms. Kelmar Associates Specialty Audit Services Audit Services U.S. Verus Financial No formal appeals process in most states No mention in model acts Litigation only recourse in many states Delaware: Formal administrative appeals process, effective July 23, 2010 (12 Del. C. 1158(b)-(k) Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 10

11 The Unique Alternative to the Big Four Tax Vs. Escheat: State Reporting Negative report or no report Reciprocal reporting Due diligence except Delaware Good faith effort at compliance; indemnification Determination of liability Data download Estimation Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 11

12 The Unique Alternative to the Big Four Tax Vs. Escheat: Estimation Of Liability Can states even estimate a liability? NJ v. Chubb, 570 A.2d 1313 (N.J. Sup. Court 1989) Arguably, only state of domicile New Jersey s approach based on Chubb Matter of convenience for other states? 1981 and 1995 Model Acts: Generally, if a holder does not maintain records for 10 years prior to the date a report is due, the administrator may require a reasonable estimate. Methodology for liability calculation Only rule there are no (written) rules! However, some states have very specific ways that they believe liabilities should be estimated. Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 12

13 The Unique Alternative to the Big Four Tax Vs. Escheat: Delaware Estimation Of Liability Before July 23, 2010 No provision anywhere in the law 12 Del. C (S.B. 272, 77 Del. Laws, c. 417, effective July 23, 2010), emphasis added: Where the records of the holder available for the periods subject to this chapter are insufficient to permit the preparation of a report, the State Escheator may require the holder to report and pay to the State the amount of abandoned or unclaimed property that should have been but was not reported that the State Escheator reasonably estimates to be due and owing on the basis of any available records of the holder or by any other reasonable method of estimation. The new law does not provide rules or guidance for estimating a liability. See Staples, supra Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 13

14 Robert Peters, Duff & Phelps STATE POLICING OF UNCLAIMED PROPERTY

15 State Efforts To Increase Unclaimed Property Revenue States have several means to increase unclaimed property collections, including: Broadening the definition of reportable property Gift cards and stored value cards: $90 billion over holiday season, 6% 9% in breakage per year (New Jersey), Mississippi, South Carolina (proposed) Unredeemed calling cards: District of Columbia v. AT&T Corp What s next? Rewards programs, loyalty programs, bottle deposits Shortening dormancy periods New York, New Jersey, Michigan, Arizona Increasing enforcement Delaware estimates less than 5% of 850,000 companies are compliant. Texas, Michigan and Indiana indicate their intention to commence imposition of penalties and interest on non compliant holders. North Carolina initiatesiti t audit program ltt letter notices to hundreds d of companies with a presence in the state. Texas, Missouri, South Carolina and Delaware increase third party contingent auditors. 15

16 Legislative Changes New Jersey: A Gift Card Quagmire State looking to capitalize on $80 million annual revenue gain July, 2010: Legislation passed for stored value cards (SVCs) Previously exempt; now 2 year dormancy The term stored value card is defined very broadly. Purchaser name and address information must be retained. If name and address information is not retained, then a presumed address is used from where card was purchased or issued. At a minimum, maintain a record of the ZIP code of the owner or purchaser. Travelers checks and money orders Dormancy periods were reduced from 15 years to 3 years for traveler s checks and from 7 years to 3 years for money orders. No dormancy fees may be imposed for credit balances, overpayments, deposits and stored value cards. 16

17 Legislative Changes (Cont.) New Jersey gift card legislation (Cont.) Nov. 23, 2010: Federal district court enjoined state from enforcement of place of purchase presumption, as a violation of longstanding priority rules. Nov. 24, 2010: Treasury Division issues guidance If issuer obtains the name and address of the purchaser or owner of SVC issued in New Jersey, then it must continue the practice. If issuer required the registration of card by purchaser or owner before use, then the name and address must be obtained at that time and maintained by issuer. All other issuers are required at minimum to obtain purchaser s ZIP code and must have a system/process capable of recording and maintaining the purchaser s ZIP code (by Jan. 2, 2011; effective date deferred to Feb. 1). 17

18 Legislative Changes (Cont.) New Jersey gift card legislation (Cont.) Jan. 13, 2011: Federal district court upholds ZIP code collection requirements January 2011: Appeal filed with federal circuit court on behalf of retailers/svc issuers, claiming: ZIP code collection requirement is not severable from the place of purchase presumption. ZIP code collection effort places an undue administrative and an economic burden on issuers. Purchaser ZIP code requirement is an unconstitutional taking of property. Purchasers of the card are not presumed to be owners, given that SVC gift cards by their very nature are intended to be given away. Risk of non compliance includes exposure to substantial penalties. Penalties reach up to $200 per day for each failure. Willful disregard of rules $1,000 per day, up to $250, per failure 18

19 Legislative Changes (Cont.) Other State Changes New York HB 11586: Enacted 8/11/10 Reductions in dormancy periods from 5 years to 3 years for all banking property escrow property, customer credits and vendor checks Michigan HB 6421: Enacted 9/23/2010 General dormancy period from 5 to 3 years. Money orders from 7 years to 3 years. Gift cards, from 5 years to 3 years (although (lth hgenerally exempt) Delaware SB 272: Enacted 7/23/2010 Administrative review process at the conclusion of an unclaimed property examination Created a limited exception from unclaimed property for goods received but not invoiced (GR/IR) States that Delaware may employ estimation techniques in order to determine a holder s liability for prior periods 19

20 Tracey Reid, Reid Unclaimed Property Services STATE VS. THIRD PARTY AUDITORS

21 Contract Auditors Vs. State Auditors Why does it matter? Auditor compensation and financial interest in the audit Legal limitations of auditor Audit process Confidentiality concerns Decision-makers 21

22 Types Of Unclaimed Property Auditors Third-party contingency fee auditors State auditors Other state auditors, regulators, a.k.a. indirect auditors 22

23 Third Party Auditors: Bounty Hunters Most states use third-party firms to audit unclaimed property compliance. Third-party d firms typically perform an audit for a contingency cy fee, based on a percentage of the assessment. Incentive to make assessments as high as possible and to use aggressive estimation techniques CONFLICT OF INTEREST?! 23

24 Third Party Auditors: Bounty Hunters (Cont.) Nationwide third-party audit firms The National Abandoned Property Processing Corporation (NAPPCO) [owned by ACS] Kelmar Associates, LLC ACS Unclaimed Property Clearinghouse RDS (Revenue Discovery Services) Verus Financial Some third-party audit firms offer voluntary disclosure services on behalf of the holder. 24

25 State Unclaimed Property Auditors Do not have financial interest in audit May have revenue goals set by state May inform other states of property Do not pre-empt future audit by third-party audit firm for same time period 25

26 Oh Other State Auditors: Indirect Auditors Sales and use tax auditors Eg: E.g: Florida Industry regulators Insurance Energy 26

27 Robert Tucci, True Partners Consulting POTENTIAL AUDIT TRIGGERS

28 Potential Audit Triggers: State And Third Party Overview Companies that have been filing unclaimed property reports for a number of years are just as susceptible to an unclaimed property audit as a company that has never filed. Companies are chosen for various reasons. Audit triggers typically include the following categories: Company structure Reporting procedures (or lack thereof) Outliers 28

29 Potential Audit Triggers: State And Third-Party Company Structure State of incorporation Second priority rule Delaware Company size Generally, the greater the revenue, the greater chance of being selected for an audit. Fortune 1,000 29

30 Potential Audit Triggers: State And Third-Party Company Structure (Cont.) Physical presence in a state Headquarters of holder Large physical presence in a state Large number of employees in a state 30

31 Potential Audit Triggers: State And Third-Party Reporting Procedures Failure to file annual unclaimed property reports Failure to file all applicable property types Most commonly, accounts receivable credit balances/small balance write-offs Industry specific property types (e.g., mineral proceeds, rebates, customer deposits) Gaps in reporting to applicable states Failure to file negative reports as required in certain states 31

32 Potential Audit Triggers: State And Third- Party Reporting Procedures (Cont.) Claiming unclaimed property from a state where the company has never filed a report Filing zero or negative reports year after year History of non-filing and then filing an initial i i report that contains large number of past-due items and has large remittance amount Filing of an incomplete voluntary disclosure agreement (VDA) 32

33 Potential Audit Triggers: State And Third-Party Outliers States desire to raise revenue Recent media attention Launch of a new program (e.g., gift cards, rebates) Earnings/revenue windfall National media attention ( Wall Street Journal test ) Industry audits States have a tendency to focus on specific industries. Rise of contract audit firms specializing in specific industries, such as insurance 33

34 Potential Audit Triggers: State And Third-Party Outliers (Cont.) Whistleblower protection Athirdparty third-party audit firm advertises a whistleblower protection program for individuals who know of situations in which companies are not complying with state unclaimed property regulations. Mergers and acquisitions States, and their contract audit firms, monitor significant transactions and then audit the acquired companies books and records, typically three to four years after the transaction. 34

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36 Tracey Reid, Reid Unclaimed Property Services Chris Hopkins, Crowe Horwath AUDIT PREPARATION TACTICS

37 The Unique Alternative to the Big Four To VDA Or Not To VDA Once tagged options are limited Possible exceptions: Michigan, New York, a few others Most state will entertain a VDA prior to notification of audit. Often informal; no statutory or regulatory provisions Delaware: Set forth in regulation (CDR ), regs pdf VDAs in states other than auditing state? State of domicile not participating (yet) A lot of presumed abandoned property with owner addresses Otherwise Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 37

38 The Unique Alternative to the Big Four Benefits Of A VDA Waiver of penalties (almost always) Imposed on audit? Waiver of interest (usually) Imposed on audit? Reduced lookback period (usually) Delaware VDA back to 1991 Delaware audit back to 1981 Control of estimation methodologies! Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 38

39 The Unique Alternative to the Big Four Basis For Estimation Typical formula for error rate : SAMPLE PERIOD EXCEPTION ITEMS SAMPLE PERIOD SALES Exception items = unresolved (un-remediated) items Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 39

40 The Unique Alternative to the Big Four Complete Books And Records Owner names and addresses Chart of accounts, trial balance, general ledger, sub-ledger detail Disbursements Bank statements Bank reconciliations Un-cashed check lists Detailed AR aging schedules for account receivable In electronic format (ideal) Earliest, 2-plus years for sample period Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 40

41 The Unique Alternative to the Big Four What Is Adequate Remediation? Ideal: Extemporaneous, written documentation Sometimes subject to debate (and negotiation) Due diligence during audit returned to owner or escheated Owner release letters: Broad vs. specific Print screens Potentially excludable items Government, government agency, tax payment Public utility Charity, grant recipient Payee with foreign address Exemptions and pre-emptions: Audit state, address state Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 41

42 The Unique Alternative to the Big Four Exemptions And Pre-emptions Exemptions and pre-emptions p can yield huge audit savings. Based on actual data Identical business and financial records Different state of domicile $5,000 $3,000,000, Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 42

43 The Unique Alternative to the Big Four Exemptions And Pre-emptions (Cont.) Retail Gift certificates and gift cards Merchandise/store credits Stored value cards B2B 14 states, give or take Statutory Policy Pre-emptions ERISA Bankruptcy Industry-specific Read and understand the law; hire counsel Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 43

44 Robert Peters, Duff & Phelps BEST PRACTICES DURING THE AUDIT

45 Holder Best Practices No prior reporting history Perform an initial high level review of all potential unclaimed property Initiate voluntary disclosure agreements in jurisdictions where the potential liability is high, in order to help abate interest and penalties Establish policies and procedures for the compliance function Begin annual compliance reporting Prior reporting history Review all current and prior reports to ensure items were not over reported Build or buy system that enables organization to track property from period it becomes outstanding until it is remitted to the states, or eliminated as reportable property Establish policies and procedures for the compliance function Preparing for an audit Negotiate confidentiality agreement and establish scope of the audit Establish responsible parties in the company to assist with the audit Perform your own high level review of all potential unclaimed property Assess impact of systems conversions, acquisitions, availability to adequately research prior years 45

46 the standard of proof that Delaware has required (the holder) to provide is akin to the criminal standard of beyond a reasonable doubt. This is a much higher standard of proof than the preponderance of the evidence standard that would apply to any litigated dispute ~Staples Inc. v. Delaware Department of Finance et al., May 5, 2010, suit filed in Delaware Chancery Court against the Delaware Department of Finance, Division of Revenue 46

47 Best Practices: Understanding Auditor s Expectations Auditors expect owner confirmations that t an item of property is not owed, in order for the property to be non reportable. A property item on a holder s books and records is prima facie evidence ofa propertyinterest. Auditors will request significant evidence to show the item is not owing to the customer/owner. For example, if an aged credit is a duplicate credit, then the holder must be able to provide clear documentation as to why the duplicate credit existed and why this credit is not owing (a credit in the same amount for the same reason was paid to the owner, etc.). What are your company s systems capabilities for tracking reasons for voids, duplicate credits, etc.? Record retention policies research capabilities. Auditors expect significant records (i.e, bank reconciliations, A/R aging reports, outstanding checklists). Holders are forced dinto an untenable position ii of proving the negative. 47

48 Audit Mitigation Strategies Audit controversy can be minimized by: Clarifying lookback period as affected by past M&A activities and prior VDAs Agreeing on a base period for each of the property types Agreeing to a sampling methodology by property type Agreeing gee gadequate remediation edato for potential t items of reportable e popety property including: Voided checks Stale, dated tax payments or utility payments Unapplied customer credits Customer deposits Consumer rebates (Understand the implications of Staples, Inc. v. Delaware Department of Finance et al. and CA., Inc. vs. Delaware Dept. Finance) 48

49 Chris Hopkins, Crowe Horwath INTO THE FUTURE

50 The Unique Alternative to the Big Four Wrap-Up: States Are Bleeding Red States shortening dormancy periods under guise of returning money to owners sooner Michigan: Shortened across the board Missouri: Payroll checks Arizona: Traveler s checks Delaware, South Carolina, Louisiana and Arizona Most outrageous, egregious, preposterous (Jackie Chiles) example: New Jersey s grab at unredeemed stored value cards (discussed above) Precursor for elimination of certain exemptions? Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 50

51 The Unique Alternative to the Big Four Wrap-Up: Prognostication More attempts by states to claim no address property Could we see federal legislation overturning TX v. NJ, 379 U.S. 674 (1965)? Money orders and traveler s checks post- PA v. NY, 407 U.S. 206 (1972)? Expiration of post- DE v. NY, 507 U.S. 490 (1993), stand-still agreement More specialized and industry-specific audits; e.g., Verus in insurance industry New categories of purported unclaimed property? Affinity yprogram rewards Cyber-property Synthetic currency Stay tuned! Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 51

52 The Unique Alternative to the Big Four Legal Advisory Crowe Horwath LLP does not engage in the practice of law. Holders should consult competent legal counsel to address specific unclaimed property legal issues and to interpret state law and other authorities. Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction Crowe Horwath LLP Audit Tax Advisory Risk Performance 2010 Crowe Horwath LLP 52