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Five W’s of Unclaimed Property Record Retention

By: Cathleen A. Bucholtz Matthew B. Chenowth Michelle Moloian |

Anyone following the latest blogs and articles about unclaimed property (“UP”) cannot help but notice the doomsday tidings of more audits on the horizon. While this is nothing new, it has gained greater momentum given the COVID pandemic’s impact on State revenues. States need money, and they are looking to UP to fortify their revenue deficits. For example, New York is issuing a significant amount of invitations to participate in their Voluntary Compliance Program.  Moreover, Delaware has issued multiple batches of Voluntary Disclosure Agreement invitations, which if ignored or declined, will result in an audit, and many other states are also ramping up their audit efforts.

As the risk of audits increase, corporations should continue to take proactive steps to prepare. To help, the following points dive into the details of what may be the most important element in preparing for an audit, second only to proper annual reporting. Implementing the following ”5 W’s” in your record retention policies and practices will help to mitigate much of the heavy lifting, resource challenges and protracted duration of a UP audit.

Who, What, When, Where and Why of UP Record Retention

  1. WHO should have oversight over the record retention responsibilities related to UP?
    • The individual who oversees the reporting process should also oversee and work with the various departments that are reporting UP items to ensure that each department’s source documents are properly archived (e.g. bank records, aging reports, etc.)
    • The IT Department must be involved to create an archive that will not be purged based on the company’s general record retention policies. These records should ideally be kept indefinitely, but if that is not practical, then they should be kept no less than 15 years.
    • The CFO, CIO, Tax Directors, internal legal team or similar level personnel should be made aware of this extended retention requirement to obtain the needed approvals and resources to create a dedicated, permanent “UP Compliance Archive” in the company’s internal record retention policies.
  1. WHAT should be archived to support that an aged liability was properly resolved? Keep in mind that internal system notes alone are generally not regarded as sufficient proof that a liability was extinguished. The following are examples of remediation support that would be sufficient to support that a liability was resolved:
    • UP filing history that includes detailed records of line items reported, as well as proof of remittances made to the jurisdictions (e.g., bank statements). This should also include due diligence letters that have been returned by addressees indicating that amounts are not owed.
    • Bank Statements and reconciliations for both open and closed bank accounts, including check registers, outstanding and voided check lists, and ACH payments and refunds. Records should include monthly or quarterly bank statements that can support checks issued and cleared, as well as completed ACH transfers.
    • Accounts Receivable aging reports and documents to support that aged credits have been utilized or refunded. For example, if a credit memo was issued for an aged credit balance or returned products, archive copies of the invoices and sufficient customer account detail showing the credit memo was applied to the customer account should be retained. Likewise, if a refund check was issued to clear the aged credit balance, bank statements would be needed to support that the refund check was cashed.
    • Merger and acquisition history and purchase agreements. If an acquisition was an asset purchase, purchase agreements addressing specific included and excluded assets should be archived.
    • Other support documents include, but may not be limited to, trial balances, charts of accounts, policies and procedures related to uncashed checks, voided check processes, and aged credit balances, UP policies and procedures and any other documents that relate to the resolution of aged liabilities that could result in UP if not resolved.
    • Access to legacy or predecessor ERP systems if the acquisition/ERP change occurred within the last 15 years and if the system contains documents that could support resolution of aged liabilities.
  1. WHEN should these documents be archived? The easiest time to save a document is when you access the documents while performing standard duties such as, month end or quarter closings or when you reconcile bank statements.
    • When reconciling bank accounts, copies of the bank statement, reconciliations and other related documents should be copied to the long term UP Compliance Archive folder.
    • When you run trial balances or Accounts Receivable aging to identify various transactions, copies of the accounting cycle reports should be saved in the long term UP Compliance Archive.
    • The longer you wait to copy and archive a document after it has been referenced during an accounting cycle, the harder it will be later to remember to locate and save specific documents.
    • Delay also increases the risk that the document(s) could be lost through the company’s document retention/purge process.
  1. WHERE should records be archived to ensure you have access for a minimum of 15 years?
    • It is best to establish a permanent or long term UP Compliance Archive folder that will not be purged as part of your company’s record retention purging process.
    • If your ERP has annual blanket purges, you should work with your IT group to determine where the permanent UP Compliance Archive folder should be maintained.
    • If your IT group cannot carve out a specific location in the ERP system, then another location in the company’s internal computer network should be created, and a policy added to the company’s retention program regarding the UP Compliance Archive.
    • Each department that participates in the annual UP reporting process can maintain its own archive. At the end of each report year, the various archives should be saved to a single long-term or permanent UP Compliance Archive folder with specific subfolders related to the specific UP report year (e.g. 2020 UP Report Year UP Compliance Permanent Archive).
  1. WHY all the effort? Remember, the best defense under audit is having adequate documents to verify that an aged liability was exhausted.
    • System notes must be supported by other external documents such as bank records, invoices, and credit memo’s. In the absence of such documents, your company’s state of incorporation may audit per their standard look back period, generally exceeding 10 report years, and estimate for periods where records are not available.
    • Estimations may result in exposure assessments that favor the state. While many courts have ruled in favor of companies that claimed audit estimations were in fact biased and or flawed, most audit assessments do not warrant an expensive and drawn out litigation process.
    • Proper and timely archiving of documentation, occurring contemporaneously throughout the year, is the best option to defend your company under audit. In addition, responding to document requests is where most audits stall, as companies expend resources combing through years of records and millions of transactions. Having an audit ready archive can cut years off the duration of an audit.

In conclusion, in today’s aggressive UP audit environment, proper reporting, robust UP policies, training your team, or using professional advocates is not enough to defend your company once an audit begins.  While each of these are solid best practice approaches, once an audit occurs, your best defense is adequate records to support the remediation of aged transactions such that they are ultimately determined not to be UP.

If you have any questions, please do not hesitate to reach out to the contacts below.