On the heels of landmark litigation and revisions to the Uniform Unclaimed Act, New York's unclaimed property (UP) administration (Administration) recently shortened the state's Voluntary Compliance Agreement (VCA) look-back period by 10 years and began contracting with third-party contingent fee audit firms.

Background

Within an audit or VCA look-back period, there are two main liability scenarios. First, the property would be due to the state of the owner's last known address when identified in a holder's books and records. For periods within the look-back for which records are not available to identify the last known address, however, the state of incorporation can lay claim under priority sourcing rules set forth by a series of U.S. Supreme Court rulings. The state of incorporation will utilize estimation or extrapolation to determine the liability for these unknown periods.

Voluntary Compliance Program — reduced look-back period

The New York Administration offers a formal VCA program that allows a holder to self-calculate and disclose its liability without the imposition of penalty or interest. The VCA is always a preferred method for a holder to come into compliance (as compared to being subject to a state or contract firm audit). Given the recent significant reduction to the New York look-back period, however, a VCA is even more advantageous.

In order to participate, a holder must:

— Not have been contacted by the Administration for a UP audit

— Be a first-time reporting organization (in some cases, the state's VCA program allows Holders who filed in the past to apply again if they failed to report a particular type of property and want to voluntarily correct the error)

The Administration offers two options for complying voluntarily:

1) A self-audit checklist filed with the Administration with an accompanying liability report. This option does not provide a substantive review or a full closure of these periods.

or

2) A more formal program in which a VCA is entered with the Administration with detailed exposure calculations prepared and presented to the state. This option will require greater review by the Administration but will provide closure after acceptance.

Typically, corporations with potentially material exposure in New York use the more formal VCA program, while corporations or other business entities that are filing for the first time in New York typically choose the self-audit check-list to avoid interest and penalties and disclose past due liabilities to gain retroactive compliance. A key benefit to entering into a VCA is the shortened look-back period as compared to an audit. As of January 2017, the VCA look-back period is limited to 10 years plus the applicable dormancy period for the UP to be reported, as opposed to a look-back period back to 1996 before this change. For example, the revised formal VCA agreement form from the Administration reads as follows:

The examination and any resulting Abandoned Property Report will cover the reportable periods from 2007 through 2017. This would include, but is not limited to, unclaimed wages, accounts payable checks, refund checks and rebate checks issued and/or payable from 2003 to 2013 as well as other general ledger items including accounts payable and receivable credits including merchandise credits issued 2001 to 2013.

Additional benefits of VCA include:

— Ability to perform a self-directed review and not respond to burdensome and sometimes extraneous audit requests

— Reduction of additional human resource costs on the holder

— Waiver of interest and penalty associated with unclaimed property that is remitted late

Mailing campaign — respond to New York timely

The Administration continues to regularly send letters to holders it believes have not complied with the state's abandoned property law. These letters are sent to a business organization's CFO or Controller-level individuals and contain the self-audit checklist discussed previously. These "friendly" notices must be reviewed and considered immediately, as timing for compliance is triggered by the date of the mailing (six months to respond, with an additional 90-day extension available). EY observes that these notices are mailed to companies that have never reported UP in New York but have some connection to the state, even if the only connection is a mailing address. In some cases, the letters are being sent to seemingly random or immaterial affiliated legal entities within the Holder's organizational structure. Therefore, care should be taken when deciding how to respond to such notices as the implication to the overall operating structure can be significant. As discussed, even after receipt of such a notification, the holder can decide which VCA option to pursue, as long as communication and response is recorded timely with the Administration.

When any affiliated entity in the holder's organizational structure receives one of these notices, EY recommends as a best practice fully assessing whether any business entity in that structure has any activities implicating a New York UP filing obligation.

Third-party conducted audits

More than half of the states contract with various UP audit firms to enforce UP compliance and manage their audit programs. These audit firms are generally paid on a contingent fee basis depending upon their findings. Consequently, their reviews tend to be far reaching and focus on operations or areas of the organization that may yield the highest exposure. Often, the third-party audit is initiated by one state UP administrator to which other state administrators can join. It is not unusual for 20 to 30 states to be joined on one exam. Considering that different states can have different lookback periods, these third-party, multi-state audits can result in significant exposure risk.

While the Administration historically has been active in UP audits, it has infrequently used external contingent audit firms. EY has learned that the Administration has newly contracted with several well-known and aggressive contingent fee audit firms. New York's move to contract auditing may most affect the financial services sector, given the knowledge base and manpower of these particular audit firms, in addition to the number of financial organizations domiciled, located or conducting business in New York, with potential for significant owner/first priority rule findings due to New York.

Implications

Holders should consider participating in New York's UP VCA program because deciding not to respond to the Administration's letter campaign is likely to result in a third-party initiated audit that could ultimately expand into a far more complex multistate UP audit. If a third-party audit was commenced, holders also would lose the benefits of the VCA program, which include waived interest and a shortened look-back periods. Moreover, the resource strain under an audit of this magnitude is significantly greater than complying under a VCA. Further, organizations that do not believe they have fully complied should consider initiating a review internally.

———————————————