Unclaimed property: a holder’s largest exposure … a buyer’s due diligence

Unclaimed property audit rates are low—even lower than the IRS audit rate, which is less than one half percent. Most “holders” of unclaimed property will never be contacted by a state’s unclaimed property department. While “playing the audit lottery” is never a good idea, it’s an especially bad idea for holders contemplating the sale of their business. In fact, a holder’s largest exposure for unclaimed property lies with the buyer of the holder’s business, rather than the state.

During an unclaimed property audit, states routinely ask for a list of a holder’s historic acquisitions. A holder generally inherits the unclaimed property exposure of any companies purchased—particularly in a stock acquisition—and states often attempt to assess an acquired entity’s unclaimed property liability against the purchaser. For that reason, unclaimed property review has become a routine part of a buyer’s due diligence checklist.

During due diligence, the buyer will engage unclaimed property professionals to review the books and records of a selling holder and determine the maximum unclaimed property exposure. Because the unclaimed property professionals and the buyer have great incentive to maximize unclaimed property exposure, all subjective determinations will be made in the buyer’s favor. For instance, buyers will apply all penalties and interest and utilize a lookback period that dates back to the selling holder’s year of incorporation. The buyer will then use the maximum exposure number to negotiate a lower purchase price of the selling holder’s business. If the unclaimed property exposure is large enough, the buyer may walk away from the purchase altogether.

A buyer’s due diligence almost certainly creates larger unclaimed property exposure than a holder could obtain through a state-operated voluntary disclosure program. Most voluntary disclosure agreements offer benefits such as limited lookback periods and penalty and interest relief. Holders who proactively obtain professional assistance also have the opportunity to reconcile potential unclaimed property to further reduce exposure. As such, a selling holder should consult with unclaimed property professionals to determine the best course to limit unclaimed property exposure.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.