Dealer Insights - Nov/Dec 2010 Turning Up The Heat on Auto Dealerships - States Step Up Unclaimed Property Retrieval

November 01, 2010

Revenue-strapped states nationwide are enforcing their unclaimed property laws with new vigor. Louisiana's Unclaimed Property Program, for example, reports closing out fiscal 2010 with $62.1 million in collections and only about one-third ($22.3 million) of that "refunded" to the original owners. Both dollar amounts smashed previous records for the 38-year-old program.

Like many states, Louisiana has found that the end result — a substantial boost in its funds — is worth the price of collection efforts. As part of the retrieval process, states are arranging audits of unclaimed property, and auto dealerships are common targets.

What constitutes unclaimed property? 

Unclaimed property at auto dealerships typically includes unclaimed payroll checks, uncollected customer rebates, uncashed checks, F&I product cancellations, accounts receivable credit balances, customer overpayments, credit balances and buyer deposits that dealers are legally required to return.

If a financial asset has been left at your dealership for a year or more with no contact from the owner, you may have unclaimed property on your hands. The length of the "dormancy" period — the time between the last contact with the owner and when the property must be relinquished to the state — varies from state to state and from asset to asset. In most states, it's the business's duty to try to locate the unclaimed property's owner.

Many businesses have improperly treated unclaimed property as a type of revenue, which can lead to inflated income statements. However, unclaimed property generally shouldn't be treated as income — the property should be remitted to the state after being unclaimed for the statutory period of time.

Overlooked until now 

Virtually every state has a department that holds unclaimed property in safekeeping while it attempts to find the owners. If the state can't locate the owner after making reasonable efforts during the dormancy period, the unclaimed property reverts to the original owner's resident state.

In many states, businesses — including dealerships — are required to file an annual report disclosing that they're holding unclaimed property. Businesses generally must identify the unclaimed property, reveal the original owner and supply the dates of when the property became payable and when the last transaction with the owner took place.

Businesses also typically must maintain related records for three to five years after the property is reported and may face monetary penalties if they fail to meet the reporting requirements, pay the state or turn over the property. Fines can be high, such as $25,000 plus 25% of the value of the property, or more.

Some states are providing amnesty programs as an incentive for conforming to unclaimed property rules. An amnesty program might, for example, waive penalties for first-time filers, businesses that missed reporting deadlines and businesses that have been inconsistent in their reporting.

Penalties and interest also are typically waived for holders of unclaimed assets that voluntarily come forward. Those that have been notified of a pending audit, however, may be ineligible to participate in an amnesty program.

Proactive steps 

Business sense dictates that your dealership would prefer not to relinquish assets to the state unless legally necessary. Your attorney may be able to help you establish contract terms that offer some protection. If you think your dealership could become subject to an unclaimed property audit, consult your CPA, who can work with you to determine your company's exposure by completing a self-audit or simply discussing common risk areas.

Bounty hunters abound 

Often an outside firm acts as a bounty hunter, conducting unclaimed property audits for the state. These third-party companies typically spend a relatively short time at businesses, conducting audits that often result in recoveries of $100,000 or more.

The "look back" period varies by state, but virtually all states allow auditors to look back at least 10 years, and sometimes up to 15 or 20 years. Given the high return on these short-term engagements, hiring a bounty hunter is well worth it financially for many states.

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