A Chat with Thomas Ross – Statistical Analysis in Unclaimed Property Audits
This article originally appeared in the Winter 2020 issue of the Journal of State Taxation.
By Matthew B. Chenowth and Thomas Ross
Matthew B. Chenowth and Thomas Ross discuss the changes in unclaimed property audit, including an increase in the use of estimations to calculate liabilities for companies.
As a result of the COVID-19 pandemic and the resulting economic downturn, states are looking for ways to increase sources of revenue, and unclaimed property (UP) audits are one way to do so. In addition to the growing need for revenue, an increase in the number of third-party contingency fee audit firms has made it easier for states to audit companies for UP.
Generally speaking, UP is any intangible property held, issued, or owed in the normal course of business that has gone unresolved with the owner for a specific period of time (the Dormancy Period). All industries and companies generate items that can become UP, and typical examples include uncashed payroll or accounts payable checks and unresolved accounts receivable net credit balances. When an item remains outstanding for a statutorily determined period of time (Dormancy Period), it becomes reportable to a state as UP. If the company has the owner’s address, the UP is reportable to that state—“owner known property” under the First Priority Rule. If there is no owner address associated with the UP, it is reportable to the state of domicile (incorporation/formation) of the entity holding the UP (Holder)—“owner unknown property” under the Second Priority Rule.
Estimations During Audits
During a UP audit, the review period is generally 10 report years, i.e., 10 years of a company’s UP reports are subject to review. Given that the Dormancy Period for most types of property is five years, UP audits typically look back 15 transaction years—sometimes longer. If complete and researchable records are not available for that period, the Holder’s state of domi-cile has the right to estimate a potential UP liability for “owner unknown property” for the periods where records are unavailable. As most companies’ record retention policies are for shorter periods, estimation is a routine part of any UP audit conducted by a Holder’s state of domicile.
The majority of UP audits are conducted by third-party contingent fee auditors whose compensation is deter-mined, either in whole or in part, by how much UP they can identify for the state. These audits are often conducted on behalf of multiple states at the same time—as many as 40+ jurisdictions have been known to participate on the audit of a single Holder. If the Holder’s state of domicile is participating in one of these audits, and estimation is necessary due to the lack of sufficient records, Holders must ensure that they understand the methods used to estimate any potential UP and confirm that they are fair and unbiased.
In order to get a better understanding of how estimations work, and what to be on the lookout for, we asked Thomas Ross, our expert who has over 12 years of focused experience in quantitative analysis on unclaimed property audit defense engagements. Thomas’ analytic reviews of auditors’ liability assessment methods have supported corrections and refinements in those methods, resulting in material reductions of Holders’ UP liability exposure, resulting in millions of dollars of savings to holders.
Thomas also has varied and extensive experience in quantitative consulting for the financial services, insurance, health care, manufacturing, and retail industries, and in federal-tax statistical analysis. Thomas studied Mathematics & Philosophy at Columbia University in New York and is a member of the Unclaimed Property Professionals Organization (UPPO).