Audits, How Many States Will Jump On?

By Laurie Andrews, Director of Consulting

March 24, 2020

When a client calls me and tells me that they’ve received an audit notice, I get a little bit worried. Quite often, when one audit notice is received it’s possible that another one is already in the mail.

When thinking about the potential for additional audit notices, there are two scenarios that come to mind: First, other states may join a third-party audit that has already been initiated. Second, a whole new audit could be initiated by a different third-party auditor or directly by a state.

We don’t know the ‘secret to the sauce’ when it comes to how audit targets are selected, but we have noticed trends over the years.

How you put yourself out there as a company, has a lot to do with audit selection. Have you recently had any media events or publicity (good or bad)? Are you claiming unclaimed property from the states but not compliant with unclaimed property reporting laws? Are you reporting a limited population of property types (for example, reporting only outstanding accounts payable checks, but no accounts receivable credits)? Are you incorporated in a state or paying taxes in a state but have no history of reporting unclaimed property in that state? Other potential factors that could impact your risk of audit include, but are not limited to: your merger and acquisition history, filing only negative reports, filing less property than a similarly-sized company in your industry, and the make-up of your workforce – does your industry have a large population of un-bankable employees who receive paper payroll checks?

Let’s break down an example of how additional audit notices could be received. When an audit is initiated, it is usually led by one or more states, quite often with your company’s state of incorporation involved. Other states may join this audit in hopes that the auditor will find past-due property that is due to their state. But why would another third-party auditor or state initiate a separate audit? There are several potential reasons. Not all states use the same third-party auditors, so there are situations where states can’t sign on to the same audit. In other cases, an audit may be scoped to include specific property types, but another state wants to review something different. For example, one auditor may be reviewing your customer accounts, but another auditor wants to review your capital stock. In a case like that, the same state may even contract with both auditors. Then there are the direct state audits that could be initiated as well. You could have several concurrent audits that are a huge drain on time and resources.

If you receive a notice, what should you do? Put yourself immediately into an audit posture. Secure a non-disclosure agreement with the auditor and attempt to limit the auditor’s ability to continue to shop your audit to additional states once it is kicked off. Concurrently, do a compliance check and a mini-risk assessment to get ahead of the audit. If you find that you have a pocket of property that is out of compliance or maybe a recent acquisition with a spotty reporting history, try to secure Voluntary Disclosure Agreements (VDA’s) in non-audit states to reduce the risk of those states joining an existing or initiating a new audit. Getting ahead of the auditors will also afford you the opportunity to conduct in-depth research to secure remediation documents or outreach campaigns to protect client accounts.

If you receive an audit notice, call us. We can help you perform a risk assessment, stay ahead of the auditors, recognize scope creep and defend against the audit.

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