Simplifying the property puzzle: Unclaimed property vs. property tax

The following is a verbatim output of transcribing from a video recording. Although the information in this transcription is largely accurate, in some cases it may be incomplete or inaccurate due to inaudible passages or grammatical, spelling and transcription errors.

Robert Tucci

Good morning, everyone. And welcome to the presentation today. Simplifying the property puzzle, unclaimed property and property tax. The objective of today's presentation is understanding the basic principles and rules of both property tax and unclaimed property. Understanding the similarities and differences between the two and how unclaimed property and property tax may impact your company and understanding the potential options to be more compliant or to get into compliance and address state inquiries or assessments that may occur. We'll also identify the key similarities and differences between unclaimed property and property tax. My name is Robert Tucci. I'm a principal in Baker Tilly's National Unclaimed Property Practice. Joining me today are my colleagues, Jim Wan, who's a director in our unclaimed property practice as well as friends of ours from Krell McCullough, Steve Lewis and James Stanley, who will be diving into the property tax aspect of the presentation. So the first topic we'd like to dive into is understanding the basics of unclaimed property.

So what is unclaimed property? I'll read you a kind of more formalized description of that and then I'll give you the more generic version. So unclaimed property as we know it is any intangible property that is held, issued, or owing in the ordinary course of business, and has remained unclaimed by the apparent owner for a specified period of time which we will call the dormancy period after it becomes payable or distributable. It is then presumed abandoned. In a more simplistic version of that, it is money that is sitting on a company's books and records or may have been written off historically, that was truly due and owing to someone else.

All industries and companies have the potential to generate transactions that may become unclaimed property if they go unresolved. When we think of what we normally think of unclaimed property, we typically think of the big three: payroll, accounts payable, and accounts receivable. When we think of that, we typically think of uncashed payroll, accounts receivable disbursements, aged credit balances, amounts due on a customer receivable account, dividends, stock, other security-related property, uncashed claim payments in your employee benefit plan area. There may also be industry-specific property, and most companies formally address payroll but may lose sight of more industry-specific property, which we will talk about in a few minutes. Additional obligations in the area of unclaimed property may result from accounting errors or a company's lack of understanding as to what may represent unclaimed property. Unclaimed property is not typically an area that people clamor to lead, and for many companies or organizations, it may not be given the time and attention it may require, which then may cause the company to have issues with the states, as we will see in subsequent slides, where states know that companies may be deficient in the reporting.

Where we see things go awry typically is in credit balances or items that are written off or reversed, such as tolerance level items. Another area that auditors would look to would be the voiding of checks after a specific time to determine what was the cause of those voided checks.

So who can be potentially holding unclaimed property? Really, everybody, whether it's a for-profit endeavor, not-for-profit, colleges, universities, state agencies, any operation that pays employees, pays vendors, has receivables, and/or holds property would be subject to state unclaimed property laws. As I mentioned, there are industries that generate their own specific property. So we've listed a few, this is not all-encompassing, but these are some of the ones that we might normally think of. For life insurers, it's undistributed death benefits and annuity payments. Retail stores, obviously with gift cards, many of us have purchased those over the years, and those remaining few cents or dollars on the card. Property and casualty insurers, banks, oil and gas exploration companies, both Jim and I, actually all of us, are located here in Texas, so we're very familiar with the intricacies of that industry. And then also investment firms, where you would have inactive brokerage, mutual fund, and other instruments that may go unclaimed, so to speak.

This is probably one of the most important slides: who actually gets unclaimed property? It all stemmed from, excuse me, where did this come from? The concept of unclaimed property goes back to feudal England, where if someone died without heirs, it would revert back to the crown. In the United States, we saw the adoption of these types of laws in the 1930s and 1940s. There really wasn't a lot of enforcement in the area of unclaimed property until around 2000. Then we saw states clamoring on board to enforce the statutes that they have on their books. Unclaimed property is not a tax, and we'll get into that in a bit. For a lot of the tax folks out there, they think of Nexus, which is really what is a contact that an organization has with the state. The Nexus rules do not apply, although sometimes people liken unclaimed property to a tax on bad accounting. So I would say if your record keeping is not all that great as it pertains to unclaimed property, I would take the time to get more in line with how to treat those items so that it doesn't become unclaimed property.

The basic premise of unclaimed property, or the key tenet of it, is based on a 1965 Supreme Court case, Texas v. New Jersey, which is the seminal case that really governs unclaimed property. There were two subsequent cases that reaffirmed Texas v. New Jersey. We call these the priority rules or the rules of jurisdiction. The first rule is the state indicated by the owner's last known address would get the property. If that is absent, then if the owner is unknown or the address is unknown, it defaults to the state of formation or incorporation of the company. Why that really becomes important as just an anecdote, two-thirds of the Fortune 1000 companies are incorporated in the state of Delaware, so Delaware has a keen interest in the priority rules as to who would get the property.

So who gets unclaimed property? All of the states, as I had mentioned, have similar statutes that require property to be turned over based on the rules of jurisdiction. There are 54 jurisdictions, 45 fall in the spring and seven in the summer, plus California remit in the summer. There is also an increase in the Canadian provinces kind of enforcing their statutes. So, if an organization has, let's say, a subsidiary incorporated in Canada in a certain province, there may be reporting responsibilities if that entity has property that goes unclaimed as a Canadian property owner. What makes unclaimed property a little bit more cumbersome is not all of the states have the same dormancy periods, and that varies state by state and also by property type. Typically, payroll is one year, A/P and A/R three or five years dormancy period, which again is the amount of time you can hold on to the property. Some states have reporting exemptions, and all of the states have some element of a due diligence owner notification requirement that makes you, the holder, try to reunite the property with the owner. A lot of similarities on a state-by-state basis, but obviously, there are some, like every other state law, there are nuances to that.

I'll turn it over to Steve to start for property tax.

Steve Lewis 

All right, thanks Robert. And uh good afternoon to everyone out there and hopeful that that video breaks up the presentation a little bit because I know the four of us that are presenting think this is a fascinating topic and we could talk for hours on unclaimed property and property tax. But we know that we're probably the four in the minority here, and you guys are ready for lunch, and we're gonna get through this, but we want to touch on the property tax portion of the presentation and there's a few different property taxes we pay, and my colleague James Stanley and I will try to address those for you. So we'll try to make this as painless as possible. And if at any time you have any questions, please feel free to drop a note, and we'll try to stop and answer those questions. 

So, what is property tax? Well, here in Texas, Robert mentioned that we live here in Texas. It's a four-letter word, and it's nothing that any of us want to pay. And we certainly don't want to pay any more than our fair share. But, what property tax is, is an annual or semi-annual charge that's levied by a local government and then paid by the owners of real estate or business personal property within its jurisdiction. And, why do we pay it? Well, again, none of us like paying the property tax, and especially in states where there's no state income tax, it's through the roof, but it's needed. It's something we should all be happy to pay our fair share of because those tax receipts are the main source of revenue for most local governments in the US. So they're used for schools, hospitals, police, fire departments, road construction, libraries, water and sewer departments, and any other local services that benefit your local community where you're paying those taxes. 

Ok. How does this get determined? How much we pay? And I know all of us that own homes are very curious about how they come up with the amount we pay and who the enemy is here. And we're here to tell you that the appraisal districts and the assessor's office are the ones that assess the value, but they're not the enemy and they're just trying to do their job. They have a big job to do, and they're not setting tax rates, they're not the ones in charge of how much you actually pay. They're just assessing value. So when you're arguing or you're protesting or you're in front of them, just know they have nothing to do with the amount of tax you're paying. It's just the assessment on your property. It's the local elected officials that you should be voting or not voting for that set the property tax rate based on the funding for the annual budget. So when all of the separate entities, whether it be school districts, counties, hospitals, municipal water districts, when they all get together and figure out what their budget is for that year, then the local officials set the property tax rate, and that property tax rate times the assessment is how your property tax bill is calculated. 

Ok, next slide. I mentioned that James is gonna take over here in a moment and talk about a separate tax that's a part of the property tax, but we'll talk about real property tax first and foremost, which is tax on immovable possessions, structures, and/or land. It could be agriculture, it could be your home, it could be commercial office space, and it's based on market value. So again, how is that value determined? It's determined by the individual county appraisal districts. And if you can imagine, take a large county like Dallas, Texas. So Dallas County, where you might have a Google AI data center next to a baseball bat manufacturing company, next to a dentist office, next to a hospital. And you've got that one assessor that is assigned to those zip codes. And so that assessor, he or she, cannot be experts on all of those individual fields. So they have a really tough task. And, there are not enough resources within an appraisal district to have vertical market experts in all of those different properties. So they take a mass appraisal technique, but they're trying to get as close to market value as possible. 

OK. So how does the process work? And this is state-dependent, but this is important for all of us. We're all very familiar with our IRS deadlines, and we all have it on our calendar. And so this is no different. In each state, there are some deadlines that stick out that we want to make sure that you pay attention to. The first is a notice of value. So usually around April time frame, and it depends by state, but around that time frame, you will be mailed a value notice. So again, with your homes, that's that first mailing you get that says, "Hey, here's what we think your property is worth for that tax year." And so then on that notice, you'll see a protest window, and it's usually 30 days from the mailing of that value notice. So what's key there is if you're not following through and following up and looking for that notice of value, you could miss that legal window to protest. So again, we suggest you find your local state when those notice of values are going to be issued so that you're out looking for them because it's really not up to the appraisal district on whether it made it to you. So it's incumbent upon the taxpayer, as silly as that sounds, to make sure they receive that notice of value. And then you have to adhere to that protest window, which again is only 30 days from when that value is noticed. 

So then we'll have informal negotiations. Usually, you would hear from a member of the local appraisal district to reach out and say, "OK, I understand you want to protest this value. Here's how I came up with the value. What are your arguments on why you feel that that's an unfair value?" And so that's where the back and forth, and we can use the house because I know that's important to everyone, is that's when you come in and tell them all the awful things about your house or your property: that the paint's chipped, the carpet needs updating, your neighbors have a much nicer place than you do. That's in the informal negotiations. If you don't like the outcome of the informal negotiations, we go to formal hearings, and that would be sometime probably a few months after that value notice. So typically, it's the beginning of the summer where those formal hearings, you'll get a notice of your hearing date. It's very much like attending a court date. You show up, you sign in, you're going to present your case in front of a board of either elected or appointed officials. A lot of times, it's retirees that are old CPAs or they're ex-realtors or whatnot that are there to listen to hundreds of cases a day. And it's your chance to shine, and you probably have five or 10 minutes to present your case, and then they're gonna rule on it right there and tell you whether they agree with you, whether they agree with the appraisal district, or somewhere in between. And you're not stuck with that. But the only course we have from a formal hearing, the only course we have to continue protesting is either litigation or arbitration. And both of those sound scary, and I mean, they are litigious and terms that seem like a fight with the appraisal district. A lot of times in commercial office space where we're talking about hundreds of thousands of dollars in tax value, frankly, the appraisal district just does not want to make that determination because they get valued or reviewed by the controllers of the state, and they don't want to look like they're not doing a good job. So frankly, it kind of gets them an out if you file litigation or arbitration. Now it's moved up the food chain within the appraisal district to make a larger value determination. So don't look at that as anything the appraisal district, we hear that all the time, or the appraisal district gonna be mad at me. So next year, am I going to get a bigger increase because, you know, we threatened to sue them last year? And that's not the case. The appraisal districts do not take that as any slap in the face. It's just the next part of the process. 

Ok, James, I'll let you take over here. 

James Stanley

Ok. Thank you, Steve. Hello everybody. As Steve mentioned in the property tax world, we basically have two sides of the coin: the real estate being land and the building, and the other side, our favorite business personal property, is that redheaded freckled stepchild that nobody really likes to deal with. It causes a lot of heartburn for some taxpayers because it has a lot of trap doors to it. But if you navigate it properly, the whole cycle, you can come out of it OK and even in a positive position. But business personal property defined is basically going to be anything that's not real estate, not land and building. It’s going to be your fixed assets, in some states, the inventory that you have on hand, it can be rolling stock, it can be basically anything non-land and building, and it's going to be different from state to state, jurisdiction to jurisdiction on how they treat it. What is kind of across the board, known quantity in business personal property, is that it is supposed to be treated and taxed at its fair market value the same as the real estate. But that is a very slippery slope, and it's a kind of ambiguous situation on how much is this fixed asset worth versus that fixed asset? It’s a little bit tricky, but the goal is to derive fair market value. Don't always get there.

How is the value determined? As with the real estate, each county assessor or county appraisal district is responsible for valuing all of the fixed assets that a company has at their premises on the assessment date of January 1st. They do that again by these mass appraisal techniques because they simply don't have the resources to go out there and really properly value all the assets one by one. It's just not possible. So how they go about doing that? And, I believe we had a question in our chat that kind of touches this. Each county has its own version of a depreciation schedule. That depreciation schedule is carved up into broad fixed asset categories, furniture and fixtures, machinery, equipment, computers, and so forth and so on. All of those assets for every taxpayer within a specific county are utilized in that same depreciation schedule. And you can imagine that it causes a lot of inequities in values. But it's a very broad-based mass appraisal technique that each county utilizes.

How that works throughout the year? Each year, we have a process or a cycle that we as taxpayers or taxpayers' representatives go through, and you can see down there at the bottom of the slide there, starting with your rendition deadline. This is going to be, again, similar to your income tax filing that you do for your personal income tax. Any company that has fixed assets in a state or jurisdiction that assesses personal property is required to submit that rendition, that return, that declaration as it's called by a given date to that county assessor. That's usually in Texas, and it's usually around mid-April. There are also some exemptions that come into play, and we'll talk about more of those a little bit deeper here shortly. Those are usually a second separate compliance stocks band with a separate deadline in Texas. Again, we're looking at April 30th. So taxpayers, in this case, have two deadlines that they have to contend with each and every year, about 30 days following this compliance due dates. The assessors will send out their value notice just like on your home real estate, just like on your commercial real estate. You'll get a value notice that says, "We think the value of your property after we've processed your rendition is X." If we're happy with X, then we don't need to do anything. If we're unhappy with it, which we often are, we have the same protest window and same protest cycles that Steve just mentioned on the real estate. We have an informal settlement opportunity to sit down one-on-one and hash out a proper assessment. If we're unhappy there, we go to a formal hearing and let an arbitration board rule upon what they think the value is. And if we're still not happy, we can go ahead one step further and go to litigation or arbitration. But the same rights to the taxpayer for business personal property are the same as the ones for your real estate as far as property tax, and it's something that you should actively participate in each year.

Next slide, please. Ok. So it's often a question we often get: does every state actually assess business personal property? And the answer is no. Currently, there are 37 states of our 50 that have some sort of mechanism to assess business personal property. Up in the northeast part of the country and in the Midwest, they have opted out over the years of even assessing or taxing BPP. However, there is lost revenue associated with that. And in those cases, in those states, you typically will see a higher burden on the real estate tax, property taxes because they have to make up that lost revenue somewhere. But there are some states that these requirements and the taxes for BPP are just not even in the equation.

Next up, is inventory included in business personal property? The answer is yes and no. Certain states do not tax inventory, certain states do, Texas being one of them. And you can imagine how, in a lot of states and a lot of industries, that can be a substantial number. So the interesting thing about inventory is, it’s treated by the assessors using those mass appraisal techniques. Again, what do we have on the books as far as total costs on the assessment date? Well, when you start looking at that and you start stripping away at that number, the fair market value of that inventory can be totally different. So where it is taxable, there are some opportunities to bring that number down lower than what's on the financials. Are all of my assets in my building taxable? Confusing, the answer to that is yes and no. It depends on how you scrub the assets, what kind of assets we're talking about in that building. But most often, when you take a look at that, you're going to find that there are items that do not pass the test of taxability for BPP, and they should not be included in your assessment. Some of those items that we see are software, leasehold improvements, and some maintenance-type items and licensing agreements. Those are not going to be taxable as business personal property. They are often included by the assessors. Once we're able to identify them, we can almost always strip them back out of the value, and your taxable value will decrease.

Finally, on this slide, are there any exemptions? Yeah, there are a lot of different types of exemptions depending on what we're talking about here. Just to highlight a few of these things here, you know, the aforementioned inventory, if you have goods in transit that pass certain rules, then there is going to be an exemption available for that portion of inventory that leaves the state. You have to understand the rules, you have to understand the timing and the filing, and it's an annual function, but it is something that is a huge benefit to taxpayers who qualify. Some other ones: you can have, in manufacturing facilities, there are some pollution control type of assets that are exempt from your total value. In some cases, rolling stock and aircraft, you can have interstate allocations where you're only forceful on it a period of time that your vehicle or airplane is in the state of Texas. And then certain commodities that are stored or in transit in and out of Texas for a short period of time, green coffee, cotton, those types of products are exempt as well. So there are plenty of ways to capture some exemptions, you just kinda have to know what they are and how to maneuver through them, identify them, and apply for them, but they are available to us.

Jim Weigand

All right. So, aside from sharing the word property in both the names of these concepts of property tax and unclaimed property, let's start by just doing a quick contrast with some of the key similarities and differences between unclaimed property and property tax. Some of the similarities, aside from the obvious fact that everybody has to deal with it in some fashion or another, is that there's an annual reporting requirement or compliance requirement. We'll talk about the different deadlines in a minute, but if you're not doing something with either property tax or unclaimed property, chances are at some point, some regulatory body is gonna start asking questions. With state and municipal budgetary gaps being what they are, there's an increased focus on this from an enforcement perspective. Unclaimed property shouldn't be perceived as such, but it is. It's a way that some states, including Delaware as Robert alluded to earlier, plug their budgetary gaps by enforcing the unclaimed property laws that are on their books, especially that owner and unknown property that has a low likelihood of being reunited with the owner. So again, enforcement is on the rise. There are appeals processes if an unfair assessment is rendered in the context of an audit in the unclaimed property realm. There is a way to seek relief, similar to the valuation side of the real property that gives rise to the property tax assessments that James and Steve were talking through. There is recourse or steps to take to kind of get the assessment lowered in some fashion or another. There are planning opportunities, as an example, in the property side. There are gift cards, like if your company issues gift cards or structures that could be put in place to minimize how much of that of the unredeemed balances that Robert touched on. It could result in reportable property. You have to make sure you know what the rules are and you follow it. And on the property tax side, there are exemptions that you need to be aware of. There are ways to categorize assets that may lend itself to positive effects on the assessment. It's just a matter of making sure you know what those rules are and you are able to argue that to the appropriate municipality.

So, I'll cover some differences. Robert called this out earlier, unclaimed property is not a tax. It can be likened to the tax on bad accounting just due to poor record keeping. At the end of the day, it is not a tax. Whereas obviously the assessments on the property tax side are more based on the real property that's in question, unclaimed property is not that. It's a financial instrument. The liability is fixed and certain at the time the check was issued or credits generated. It's not attached to some arbitrary percentage that's then applied to what is the perceived value of some real property. So again, that's a key difference, unclaimed property value is fixed and certain, whereas in a property tax assessment, that could fluctuate from year to year.

Which regulatory body enforces property reporting rules? That's going to be at the state level, whereas you're dealing with counties and municipal government on the property tax side. And whether or not there's a third party, a firm that's utilized to enforce these rules, that's going to probably vary in flavor based on state. But unclaimed property, it's generally not the state that's going to be enforcing or conducting these audits. Rather, it's going to be a third party that gets paid on a contingency fee basis for every dollar to be fined. So again, it's not as, I mean, I know on the property tax side, the third parties that are utilized are more so on the collection side, not exclusively. Don't get me wrong. On the collection side, they get a percentage on what they collect. However, in this case, the auditors are driving the assessment on unclaimed property, so that's why it's a little different. When to report you have two major deadlines on the property tax side. Unclaimed property at the state level. There are three major reporting deadlines as Robert touched on, fall, spring, and summer. You've got to be mindful of those deadlines and those Rules of jurisdiction that dictate when and to which state you report property. And as I mentioned, auditor fees are not so much a concept you encounter in most taxes but in unclaimed property, contingency V base. So, they have every incentive, the auditors, to increase the number to excessive amounts, which has led to some litigation here recently over the past eight years, increased litigation and the tactics that are utilized. So again, it's just knowing what rules to play with. They're going to vary between the two, property tax and unclaimed property.

Now, highlight some of the impacts to your company, covering some trends within the unclaimed property space. First, audit proportion activity is going to be on the rise. As I mentioned, states facing these budgetary gaps are looking for creative ways or ways that they could just enforce the rules on their books to kind of plug the hole. Again, if there has really been no slowdown aside from around 2016 in the enforcement activity, just how far back auditors go, which I'll cover in a minute, and what type of properties they are going after, that's really what has varied in flavor.

That's not to say that a company who was audited, say, maybe 20 years ago is now not right for another unclaimed property audit. We've seen that time over time. The auditors are selecting companies that they knew had been audited 20 years ago but now have a full 15-year period, which is generally speaking, the scope of most open property audits. They are right for an audit under the presumption that there is some unreported liability that the company is holding on to. So, audits, no slowdown, can increase. Some audit firms target certain industries, while other firms just take the larger companies first and work their way down whatever list they are working on. And that's kind of how that plays.

State self-audits: this is a concept that really didn't exist, maybe a handful of jurisdictions up until the last five years, where states are trying to encourage, "Hey, we have multiple programs." The status of audit is friendly, holder-driven, or company-driven programs where you could self-identify and report. They'll ask a few questions, and that's it. What's happening recently is that a number of these states are contracting with the same audit firms to administer the audits as well as these programs. So, it falls in the gray zone as to ultimately what, if anything, the auditors working on behalf of these states ultimately do with the information reported by the company through the program. It's not meant in a disparaging way whatsoever. If you're going through the program or you've been notified of this program by a state, I would say fully participate. The last thing you want is to end up with an audit. But it's just unknown.

Voluntary Disclosure Agreements (VDAs) are formal settlement programs in certain states. I think we're roughly up to about two-thirds of the states having some form of VDA program on their books. Now, it's a little less than that. Delaware being the principal one here, they are required, Delaware is required, to send a notice to companies inviting them to participate in the VDA program prior to that company being put under audit. If you don't respond to that notice or decline the invitation, the state could then refer the company to an audit. So, if you or your company receives one of these notices or invitations, either the state self-audit or the VDA, especially from Delaware, don't ignore it. I would strongly encourage you to respond in some fashion or another. And if you're not sure what to do, feel free to reach out and give a call.

In the context of M&A, we want to make sure that we highlight this point. If your company is acquisitive, we want to make sure what exactly your company is buying. You could acquire unknown pockets of liability, a sense of "yes reward" if you want to look at it that way, any unreported amounts that might still be due and owing to somebody. In the context of a stock and equity-based transaction, that's going to be the case unless specific liabilities are purposefully excluded within the PSA or the purchase and sale agreement. So, you want to make sure you're reviewing that and looking at it through an unclaimed property lens. Otherwise, five years down the road, if your company unfortunately gets tagged with an audit, you're going to be on the hook for the liabilities of the company you acquired five years ago. And chances are those records and people are not going to be available.

In the context of an asset-based transaction, you're usually acquiring, depending on your industry, unredeemed gift card balances, suspense balances if you're in the EMP space like oil and gas, or it could just be receivable account balances, credits on account. The legislative trend that you want to be on the lookout for are shortened dormancy periods. In other words, states are saying, "Hey, you don't have to report property before five years; they're shortening that now to three years" to accelerate revenue collection. They're codifying the record retention requirements. Before, a lot of states did not have record retention expectations in their statutes, but as a recent trend starting with Delaware, states are saying, "Hey, we want your company to keep records for X number of years." So again, we want to make sure that you align your record retention requirements. Audits could go back 15 years as well as voluntary settlements. You probably want to align director retention requirements as it relates to records that can be used to identify, remediate, or substantiate the reporting of potential unclaimed property for a minimum of 15 years. It seems onerous and burdensome, but if you don't have those records, the auditors, if you are being contacted for an audit, will come in and estimate a liability which is oftentimes much worse than the actual exposure that might exist.

Canada is on the move. In addition to Alberta, British Columbia, Quebec, New Brunswick recently enacted unclaimed property reporting requirements. Again, these rules apply to companies that are domiciled and do business in those jurisdictions. Mostly it's not the U.S. company that has a rogue Canadian customer, that's not really what they focused on in these rules. The provinces are enacting rules for Canadian-formed companies doing business in Canada. Depending on the industry and property type, there might be some element of reporting that needs to occur. So, be mindful of that.

Moving to the audit cycle, it's a big picture, right? Company will read a notification of audit from the state and the auditors saying, "Hey, you've been selected." Everybody loves receiving those notices. Please don't ignore those either. The auditors will then negotiate an NDA more likely than not, and then we'll have an opening conference where the auditors will say, "Hey, we're representing all these states, and this is how the audit is going to play out," and it's going to vary in flavor by audit firm. They'll then commence with a scoping exercise to identify the in-scope entity, bank accounts, and/or GL accounts depending on what accounting practices your company utilized. Once they determine what the scope is, they will request detailed records which could include bank statements, reconciliations, detailed aging reports, and transaction detail reports for certain GL accounts. Then they'll move into the testing and/or remediation phase. Once they review all that information and come up with their initial population, they'll share that across saying, "Hey, we think this is unclaimed property and tell you to group otherwise." Then the company would need to review each and every one of those items to determine whether or not it agrees that it was properly handled or not and then move into due diligence. There'll be an estimation analysis depending upon the state and how far back you have records. Then ultimately, there will be a settlement process. So in a nutshell, that's how the audit process works. All that to say your expectations should be that the audit process is not going to be open and closed. It's going to be multiple years more likely than not. I have an audit right now that started in 2014, and we’re almost at the end of it. The average life cycle is probably closer to 3 to 4 years. This one just seemed to drag out a little bit longer because it got contentious. I mean, the company disagreed with the positions that the auditors were asserting. P&I could be assessed, penalties and interest, in other words, could be assessed, but generally speaking, it's waived if the holder continues to cooperate with the auditors.

As I mentioned, Delaware and a number of other states have a reach-back period under audit of 15 years, which is 10 report years plus the applicable dormancy. That's how you get to 15. So, if you don't have records back 15 years, the auditors can estimate a liability based on the period where you do have records and the error rate that's observed there. Companies of all sizes are now being audited, no one's immune. Before, it was larger companies in the Fortune 100, Fortune 1000, Fortune 250, and so on, that were the principal targets. Now, we're seeing companies down to $100 million annual revenue being selected for audit, based on industry or where they do business.

All that bad news said, there are ways to fix this. It's always better to do it on a voluntary basis, which is the point of the slide. To do it on a voluntary basis, you have to be willing to expend the resources and conduct a self-review. It's probably best to work with a third party that has experience with the state to make sure that the liabilities are packaged in a fashion that would be acceptable to the state and minimize any questions on the back end. Once you get through that process, you know what your pocket of liability is. There are a few routes that a company could go. I won't cover all the points here. There are formal settlement programs, so voluntary disclosure agreements I touched on earlier. Again, it's a formal agreement that exists between the company and the state. They agree to waive penalties and interest and close out the years covered by the VDA from audit in the future. Usually, you have about six months to complete the analysis. You could negotiate extensions. But again, once the agreement is reached, it's done and over. There are administrative steps associated with a voluntary disclosure agreement or participating in a VDA program that a company would want to consider.

There's a voluntary remittance option where you simply file the report and include a cover letter saying, "Hey, I didn't do this right historically. I'm trying to comply now. I agree to do better in the future," especially in a first-time filing scenario. This is probably the approach that we often recommend, especially in states where you don't have a VDA program or the amounts are relatively immaterial, to take the settlement process out for a $5,000 past due amount. Some VDA programs, the cost-benefit is just simply not there. And a third option that's not here on the screen is that in some cases, your company could be eligible to participate in state-assisted self-audit programs. If you report through that program, do not sign off from the state or anything, but there's a guarantee of a waiver of interest and penalties. So that's the only reason why that's worth considering.

This slide covers fairly quickly the best defense. I guess the best defense is key here, being proactive with addressing an ideal best practice on property reporting process is the best defense to survive an audit with a low assessment or to control what ultimately morphs into an unclaimed property reporting obligation. The key thing is to define in this policy the who, the what, and the when, who's going to be doing what, when are they going to do it, and what are they looking for? Assign responsibility and make sure that timelines and the scope of data collection are clearly defined. You want to make sure that you establish research criteria, materiality, as well as anything else your company, given the nature of business, might need to consider. You want to make sure you adopt record retention policies that align with that 15-year reach-back period. So if you don't have records, it's good for the state to take the position that it represents unclaimed property until you prove otherwise. Leverage technology to the fullest extent possible. But again, the last point here is to make sure you adapt your record retention requirements so that you have maximum coverage.

Steve Lewis

I'm just going to summarize these last few slides in a couple of words. We know we've got some really good questions, and we're going to try to address all those. We've got your information, and we'll get back to you individually because it looks like we've got a good number of questions that are very specific in nature, and we're not going to have time to touch on those. So, basically, in summary here on the property tax side, I say it on here a couple of times, but use an expert. It's just very ambiguous, the tax codes are written that way on purpose. It's very ambiguous. So you really want someone that understands the tricks of the trade. I mentioned here, don't submit any information that you're not legally required to. You want to give them everything that you're required to give them. It makes it very difficult. Once you've given them information that wasn't required, for instance, maybe some actual cost information, once you've given them all the goods, it makes it very difficult for someone to come back and protest that value and get you a reduction. So, I mentioned a couple of times, whether it's a third party or you have in-house folks that can focus only on property tax, you really need somebody that's an expert in the field to make sure you pay, again, your fair share but no more than your fair share of property taxes.

Jim, you can probably go on, and we'll let Robert summarize this since we're running out of time.

Robert Tucci

And thanks, Steve. In the interest of time, we appreciate everyone signing on today. We hope you found this informative. You have our contact information. If you have any follow-up questions, please let us know. We're here to help. I want to thank all the folks that put this on, all the folks that attended. Special thanks to Steve and James for jumping on with Jim and myself, and we hope you guys have a great rest of your afternoon. So again, thank you very much.