Monday, April 8, 2013

North Dakota Gets "Reasonable" About Third-Party Unclaimed Property Audits

North Dakota's Governor signed Senate Bill 2058 into law on March 15th.  In addition to giving the state tax commissioner authority to share personally-identifying information with the state's unclaimed property division it also sets forth that a new provision concerning audits. 

While the North Dakota Unclaimed Property Act (like most state laws based on one of the uniform acts) provides that the state may commence an unclaimed property audit regardless of whether the holder believes it has unclaimed property, the new law clarifies that the state many not "contract for an examination" (i.e., with a private auditing firm) unless the state has "reasonable cause to believe" that a person has failed to comply with the act.

This distinction, while minor, is a welcome addition to the precepts of unclaimed property law enforcement.  In the context of a privately-run examination -- even where the holder has little or nothing to report -- the time, effort, and resources necessary to respond to an audit is tremendous.  Indeed, in some instances, the private auditors may be working on a contingent fee (meaning, they get paid a portion of what they find) and thus have a financial interest in making sure that the audit result is a large amount, regardless of whether that is the right amount.  While the contingent fee nature of the audit should, in theory, protect a compliant holder because the auditor will not want to waste (unpaid) time trying to squeeze blood from a stone, that theory does not hold up to practice.  In reality, some contract auditing firms perform "their" audit by making burdensome information demands upon the holder, selecting items at random to be "tested" from that information, then demanding the holder "prove" that the randomly selected items are not unclaimed property.  Adding insult to injury, should the holder push back on a particularly burdensome, ill-conceived, or irrelevant demand, the auditing firm responds by threatening to inform the contracting states that the holder is being "uncooperative." 

For a variety of reasons (not the least of which is that state employed auditors do not get a cut of what they find) state-run unclaimed property audits tend to be less disruptive and less adversarial.  Accordingly, North Dakota's decision to limit the contract auditors to places where there is "reasonable cause" to believe that noncompliance exists is a welcome step for those holders who are in compliance. 

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