As states cast about for ways to balance their budgets without rousing the ire of tax-weary electorates, they’re turning to a surefire alternative revenue booster — audits of unclaimed property on companies’ books. It’s basically a no-brainer because compliance with unclaimed property regs is so poor. In the financial services industry, for example, less than one-fifth of companies are estimated to be in compliance with state laws, according to Deloitte.

Unclaimed deposits and securities are the major headaches in that sector, but companies in most industries are carrying unclaimed property in one form or another, whether it be uncashed vendor or payroll checks, unused gift cards, forgotten escrows, or undistributed benefits payments. There’s a temptation when the books close to slide these funds into income. Records are often lost or incomplete, and companies end up as plump targets for state action.

Yet many organizations seem willing to risk it. How come? I asked Debbie Zumoff, chief compliance officer with risk and compliance service provider The Keane Organization. She explained that while many businesses are aware of unclaimed property compliance requirements for their securities-based property, “compliance on the non-securities general-ledger side is often more challenging, since they have to spend money and allocate resources to achieve compliance, thus giving money to the states. Some firms take the position that they’ll wait until they get hit with an audit, which is a very risky position to take. Others don’t want to allocate the resources. And some are simply ignorant of their obligations to comply.”

The downside can be unexpectedly severe; penalties and interest can quickly add up. California, for instance, applies an automatic penalty for late reporting of 12 percent per year, compounded. “Based on our experience, the general rule of thumb is that penalties and interest can double the amount of the underlying liability,” notes Zumoff.

What are the most common mistakes companies make in their compliance efforts? Zumoff rattles off a list:

• Not reporting all property types

• Not reporting in all jurisdictions

• Using inappropriate dormancy triggers

• Taking property back into income

• Not considering reporting obligations that arise from third-party contracts

• Not considering property types such as self-insured benefits or noninvoiced received goods

• Failing to perform state-mandated due diligence

• Not providing all of the information that’s required on unclaimed property reports

• Reporting late

Keane offers a comprehensive checklist of red flags for unclaimed property audit risk here (requires a quick, free registration). ###