If your business isn’t filing unclaimed funds reports with the state, you could find yourself the subject of an audit. But even if you are filing — as every business should be — you may still find your company embroiled in a time-consuming review of your unclaimed funds, says Mary Jo Dolson, CPA, associate director in tax at SS&G.
“When they come in for an audit, often states will look back five, 10, 20 years at your records,” says Dolson. “It’s a very time-consuming process to pull all the documents required to support that you really can’t find the people you owe money to. It’s a lot of work for identifying maybe little or no money that you’re going to have to turn over to the state.”
Smart Business spoke with Dolson about how to put measures in place to lessen the pain of an unclaimed funds audit by the state.
What are unclaimed funds?
If a company owes someone money and can’t locate that person, it has to report it to the state and turn that money over; the period of time it must be unclaimed before you have to report it varies from state to state. The state puts that money in its coffers and if the owner approaches the state, it will give that person the money. But if not, the money stays with the state.
Unclaimed funds can come from uncashed payroll checks, stock certificates, gift cards, dividend checks to stockholders, items in safety deposit boxes and other items. However, business-to-business transactions never becomes unclaimed in Ohio, so you never have to report them.
Every type of business in Ohio must file. Even if you have nothing to report, you need to file a negative report with the state of Ohio by Nov. 1.
How can you avoid an unclaimed funds audit?
It’s almost impossible to avoid an audit. With taxes, if you’ve been filing returns, the state will audit a few years back; if you haven’t been filing, it might go back further.
But with unclaimed funds, it doesn’t matter whether you’ve been filing. The state will look at huge periods of time. In a recent case in Delaware, the state looked at the company going back 20 years.
What does the audit process involve?
The state will normally want to look at accounts receivable reports, at items that have been sitting out there for more than a year. It’s going to look at outstanding checks going back seven to 10 years, checks that haven’t been cashed, and that includes from every account you’ve ever had, even accounts that have been closed for years.
It’s going to look at payroll records to see if there are any uncashed checks. If you administer your own health care and issue checks, it will look at that to see if there are any checks outstanding. The auditor will also look at miscellaneous income and at bad debt expenses.
The auditor will be on site for about one week and then pull its report together. A business then has 60 days to follow up on the items the auditors feel should be reportable, find those who are due money and reissue checks. It’s really disruptive.
