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Indiana Dips Its Toe in the Choppy Waters of Unclaimed Property

Posted 4:28 PM by

In 1998 when I worked for a large, national firm, my boss walked into my office and asked, "How would you like to be our escheat expert?" I vaguely recalled hearing the "term" escheat when I was in law school but couldn't have remembered if someone had paid me. Some of our biggest clients were starting to be audited for unclaimed property, and we needed to assemble a national team to help them. 

When a business has uncashed checks or other types of aging debts on its books, that business has to turn those monies over to the state. All 50 states have fairly similar laws, so this requirement exists across the country. States that don't have the staff to do audits sometimes hire third party, contingent fee auditors who receive a percentage of what their agents are able to collect. Before we got involved, our clients were receiving huge assessments - seven, sometimes eight figures. 

So, I went to Atlanta for the rollout of our unclaimed funds practice. There, the national leader of this new service line took us through two days of intensive training in all things escheat. We all looked on in shock as she showed us a letter from one third party auditor asking a company to provide a list of uncashed checks and miscellaneous income write-offs back to the 1950s! And, this was really happening. Until 2003, I worked with some of the firm's biggest clients, helping them through the world of unclaimed property - audit defense, amnesty filings, voluntary compliance, and developing policies and procedures.

Unclaimed property has an obscure rule that if the reporting business ("holder") does not have names and addresses of the payees owed the money, everything goes to the holder's state of incorporation. For audits covering 15-20 years of records, audits utilizing extrapolation techniques to fill the gaps for missing records was the norm, not the exception. States like Delaware, with thousands of companies incorporated there, soon learned the positive impact that this obscure rule could play to its fiscal benefit.

Around this time, Indiana offered an amnesty program for non-filers. This outreach for voluntary compliers was to be followed by an aggressive audit program. However, a change in the Attorney General meant a shift in direction. Instead of audits, Indiana focused its attention for the next eight years on ramping up its outreach to improve the chance that payees would recover the property that had been reported by the estimated 2-3% of companies voluntarily filing reports. 

Fast forward 8 years to today. Indiana has a relatively new Attorney General, and he has determined that 2-3% estimated compliance from current businesses is probably high. Unless holders file reports, finders can’t track down their money. So, over the past year, the focus has shifted back to increasing compliance.  To that end, Indiana has an amnesty program that ends this Halloween. Companies that choose to participate in this program agree to report their unclaimed property for prior years in exchange for no penalties or interest.  Businesses that choose to do nothing face the prospect of an Indiana Department of Revenue auditor adding escheat to the list of taxes they examine when they come out for a visit. 

The question I get most often from businesses: Are we really required to do this? The answer is simple. If you have unclaimed property to report, then unequivocally yes. The cost this can mean to a company depends on countless factors. I tell every client, until you get your arms around what your exposure might be, you can't make an educated decision on how to proceed. The decision-making process needs to begin with good information. 

The Hoosier state is new to the unclaimed property audit business. At this point no one knows how aggressive Indiana will be – with their auditors, their penalties, or the other tools in their toolbox. Still remembering the scars from the days when clients chose to roll the dice and ended up with one of those seven- or eight-figure assessments, I know how a bad unclaimed property audit can turn out. For smaller companies, a bill from the State with fewer zeros can still pack the same relative wallop. Will this be true for Indiana businesses? 

About the Author
Tim Cook is the partner-in-charge of Katz, Sapper & Miller's State and Local Tax Group. Tim assists clients with complex business restructurings, negotiates settlements at both the audit and appeals level, and provides tax advocacy services. He also works closely with companies during the site selection process, helping them make data-driven location decisions while fully leveraging economic incentives. Connect with him on LinkedIn.

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