Beware of 5 unclaimed property audit red flags

By Eric J. Boggs; Ryan W. Hartman, MHSM, CHFP; and Omar A. Ruiz 
| 10/24/2017
Beware of 5 Unclaimed Property Audit Red Flags
With more and more states identifying unclaimed property audits as a potential source of revenue, the resulting increase in audits has moved unclaimed property higher up on the list of healthcare provider concerns. The associated risks and penalties for unclaimed property noncompliance can be significant, which makes managing unclaimed property risk paramount for providers today.

Unclaimed property is property held or owing in the ordinary course of business that has not been claimed by the owner. Common types of unclaimed property in the healthcare industry include accounts payable, payroll, accounts receivable, unapplied cash, and patient refunds. Unclaimed property reporting rules state that after a certain amount of time has passed – the dormancy period – these aged liabilities must be turned over to the state.

As states become more aggressive at pursuing unclaimed property, providers should be aware of five red flags that might make auditors come knocking.

1. Not Filing Unclaimed Property Reports

One major red flag that can lead to an audit is when an organization fails to file an unclaimed property report in the organization’s state of incorporation and/or the state(s) where it operates.

Most states are aware of the companies that do business within their geographical boundaries, and they expect to see some degree of unclaimed property reported by those organizations. States will review their databases of organizations located in, incorporated in, or licensed to do business in that state to determine which companies should be reporting unclaimed property. If those companies are not filing unclaimed property reports, it’s a red flag for the state that can trigger audits of those organizations.

2. Failing to File in Multiple States

A principal rule for unclaimed property is that it is owed to a payee’s last known state of residence. If the address is unknown, the property must be turned over to the holding company’s state of incorporation.

Often, holders report unclaimed property only to their state of operation, not knowing that they have a reporting obligation to other states. However, an increase in reciprocity agreements between states – in which states communicate with each other in cases where unclaimed property is filed in the incorrect state – is making this issue top of mind for auditors. If states receive unclaimed property that should be owed to another state, per these agreements they can send it to the correct state, which can then assess penalties and interest on the unclaimed property.

An organization often incurs penalties and interest for not filing unclaimed property reports to all applicable states. Organizations that are located near a geographical border and operate in multiple states are especially vulnerable to this risk. For example, if a healthcare provider is located in Texas near the border with New Mexico and sends unclaimed property reports only to Texas, the state of New Mexico might target the provider for a potential unclaimed property audit.

3. Inconsistently Filing Reports

Having an inconsistent filing history puts an organization at risk for an unclaimed property audit. For example, if an organization that previously had filed unclaimed property reports annually in accordance with filing requirements hasn’t filed in a while, states will take notice of that gap in filing, which automatically raises a red flag.

Organizations should file an unclaimed property report every year regardless of whether they have unclaimed property to report. To decrease inconsistent filings, many states have negative reporting requirements that require companies to submit a report indicating they have zero dollars in unclaimed property to file.

4. Excluding Property Types From Reports

Failing to include all property types on an unclaimed property report puts organizations at risk of an audit. Credit balances residing in a hospital’s patient accounting system – and not in the general ledger – frequently are left off unclaimed property reports. Aged accounts receivable credit balances are typically the largest risk for healthcare systems and can account for more than 75 percent of unclaimed property exposure.

Another commonly overlooked property type that often is not included on unclaimed property reports is unidentified cash or unapplied cash. This is money that resides in an unapplied account because the provider does not know where the money should be applied. Over time this cash may be overlooked, sometimes sitting for years, at which point it becomes dormant and should be escheated to the state.

5. Overlooking Industry and Organizational Size

One risk area hospitals and health systems can’t avoid is the fact that they are, simply, operating within the healthcare industry. Numerous audit firms specialize in the healthcare industry and decide to target healthcare organizations and then seek contracts with states. Being aware of this simple fact may help healthcare leaders remember that they are at risk of an unclaimed property audit and that they should have compliance processes and procedures in place.

Organizational size also matters when it comes to managing unclaimed property audit risk. If an organization is a large health system or hospital, and therefore generates a large amount of revenue, the organization by its nature has a high potential for instances of unclaimed property. Many of the states’ reporting forms for unclaimed property feature areas for providers to denote annual revenue, total assets, number of employees, and similar information. This is a quick way for states to gauge an organization’s size and identify red flags, such as a multibillion-dollar organization that turns over only $100 in unclaimed property annually.

Manage Risk Areas

Increasing audit activity related to unclaimed property has made the topic more of a priority for healthcare leaders. Organizations that have identified any unclaimed property audit red flags should review their processes and manage risk areas. By being aware of and troubleshooting these areas, organizations can prepare for – and possibly avoid – an audit.

Contact us

Eric Boggs
Eric J. Boggs
Principal, Healthcare Consulting
Ryan Hartman
Ryan Hartman
Senior Manager, Healthcare Consulting