Your CFO or CEO just received a letter from the State of Delaware that notifies you of their intent to "examine the books and records . . . to determine compliance with the Delaware Escheat laws." The letter goes on to say that the scope of the examination will be for 1981 through the present, and asks that all records be retained despite corporate record retention policies. It also specifies that Kelmar Associates will be conducting the audit on behalf of Delaware.
Your CEO has handed this off to you, in accounting or legal. You have no idea about unclaimed property or your company's compliance history. What's next? You've stumbled here, so that's a good start!
The Delaware unclaimed property audit letter also gives specific timelines for the next steps. You are instructed to contact Kelmar so that you can exchange contact information and schedule an opening conference. An unclaimed property audit, like many tax-related audits, is a bit of a chess game. You should be thinking several steps ahead.
The Delaware audit letter gives you two important clues: hire a third party consultant and execute a confidentiality agreement with Kelmar.
- Third Party Consultants: A third party consultant, such as Barganier and Associates, will be able to give you valuable advice on how to proceed through the audit and will be your advocate during the audit. Consultants should have years of experience handling unclaimed property audits specifically. Unclaimed property has different rules than other areas of tax. For example, nexus is not required to trigger reporting requirements to the various states and other reporting jurisdictions. Furthermore, in the absence of complete records, unclaimed property auditors may also employ extrapolation methods to estimate what liability would have been had the records been available. These methods are often unfavorable to companies, and consultants can offer other methodologies that are more favorable. As a result of these differences from other tax audits, general tax practitioners may not have the specialized knowledge required to guide your company to a successful completion of an unclaimed property audit.
- Confidentiality Agreements: An unclaimed property auditor will request such things as general ledgers, accounts receivable reports, bank records, and bank reconciliations. In addition to the sheer volume of records, the auditors may be seeing trade secrets, such as customer lists, vendors, and various customer and vendor contracts. Before these records are turned over to any third party audit firm or state auditor, there should be confidentiality and non-disclosure agreements in place to protect your company.
Do not take an unclaimed property audit lightly. Delaware, as well as other states, will be examining every inch of your company financial records, and it will be burdensome on your department. You will have to continue normal operations while trying to meet auditors requests and demands. At some point, you may even have lawyers involved and may have to prepare for litigation. Set your audit up right from the beginning to limit the impact the audit will have by employing both third party consultants, such as Barganier, and confidentiality agreements.