The decision to outsource unclaimed property (UP) compliance reporting can hinge on many factors, including the availability of internal resources, cost, and a company’s desire to keep compliance functions in-house. What complicates the decision is a lack of internal UP expertise, which can make the effort to research, review, and select a service provider a time-consuming task.
Companies that are large, have a high volume of transactions, multiple shared service centers, or have complex decentralized accounting segments face a formidable task of consolidating their departments under a single UP compliance initiative. Regardless of the difficulties, outsourcing UP compliance can reduce costs and reporting errors.
Four major factors frequently drive a company’s decision to outsource their UP reporting requirements: resource availability, expertise, cost, and buyer stress.
UP compliance often is assigned to tax departments, as they have a “compliance” platform in place. Unfortunately, most tax departments are already overburdened. Bloomberg’s 2021 Corporate Tax Department Survey of executives found 74% believe their tax department will require additional resources; 70% agreed that their tax departments were understaffed; 69% reported having difficulty recruiting and retaining good talent; and 87% anticipate recruiting and retaining will be difficult over the next two years.
Outsourcing accounting and tax functions isn’t a new concept and is often the preferred way to manage these processes for several reasons, including having access to subject matter experts, leveraging internal resources better, increasing efficiency, cutting costs, and having indirect access to task specific technology.
So why isn’t UP widely outsourced? Compared to tax, UP historically hasn’t been a priority and doesn’t rise to the level of importance or urgency as tax compliance—at least until there’s an audit. Companies that have experienced one generally move the UP function under the supervision of upper management, which often results in outsourcing compliance to mitigate future risk. For many companies that have not undergone a UP audit, the related compliance can be sidelined as staff are deployed to more urgent matters.
Other companies may have addressed UP on some level but may underestimate the effort required to be in full and accurate compliance. Perception of resource limitations can depend on understanding the level of time and effort required to ensure proper UP compliance.
When companies lack resources to perform transactional reviews, due diligence, and state research required for proper UP reporting, it can lead to reporting errors that can capture the attention of state audit departments. If a tax team isn’t confident that they have adequate resources to identify, research, and report correctly in a timely manner, outsourcing is a good option to consider.
Since UP is a state compliance function, companies can assume it falls in their internal sphere of competencies. However, UP has its own set of statutes, administrative rules, milestones, and workflow requirements that aren’t easily assimilated by existing tax department processes.
Beyond the expectation of keeping current with changing laws and reporting requirements, the lack of uniformity among the 54 potential reporting jurisdictions makes experience more crucial than it was a decade ago. States, having determined that they lack the internal expertise to adequately monitor and enforce their own statutes, have turned to third-party audit firms, some of which are paid on a contingent fee basis.
Whenever there is an economic downturn, reductions in state tax revenue pressure other state departments to make up for shortfalls. Some states are now comparing tax filings with UP compliance reports to identify non-compliant companies. This potential risk raises the stakes when determining if outsourcing UP may be a prudent option.
Increased scrutiny by states and their third-party partners creates a bigger need to mitigate potential risks and to avoid costly reporting errors. Unfortunately, hiring or developing internal expertise can be expensive.
Controlling cost is a corporate priority. Most companies won’t abandon their tax service providers due to the benefits of outsourcing, and the same logic should apply to UP. The good news is that UP outsourcing costs are competitive.
Compliance services typically include reporting data populations provided by the company, identifying liabilities requiring due diligence letters, processing claims, analyzing data for errors or non-reportable items, applying exemptions and deductions, and signing and remitting services.
When comparing service providers, keep in mind some may offer an a la carte approach, while others may offer bundled options. Be sure that the scope of services is listed so cost comparisons are accurate.
Once a preferred service provider is identified, key decision-makers may still have concerns. No one in corporate leadership wants to be responsible for an outsourcing solution that didn’t go well, which can create various levels of buyer stress. The typical drivers of buyer stress are determining which firm can meet the needs, deliver high quality service, charge a fair price, and can be trusted to deliver on their promise.
UP carries its own stress factors. It isn’t addressed in tax or accounting courses, so buyers have limited knowledge. And because associated risks are widely misunderstood, professional learning opportunities have been largely disregarded or deferred. As a result, many tax and accounting professionals don’t have UP experience, which can create uncertainty when purchasing outsourcing services. Companies may not know how much service they should purchase or whether a large, mid-tier, or boutique service provider would best serve their needs.
Fortunately, a comprehensive source of information is available on the Unclaimed Property Professional Organization website, which has a service provider directory, a certification program, access to conferences, on-demand webinars, and other resources. Companies can search for articles, webcasts, and visit individual state websites for reporting information. Doing a little homework can alleviate buyer stress and help companies find the best fit.
Companies should consider their UP compliance options to better mitigate risk and minimize cost. With careful analysis and exploration, companies may opt to outsource their UP compliance for smoother sailing in 2023 and beyond.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Cathleen Bucholtz is a tax partner with Baker Tilly’s unclaimed property practice. She has more than 30 years’ experience in private industry and public accounting, 23 of which have been dedicated to developing unclaimed property policies and procedures and filing thousands of unclaimed property reports for Fortune 500 and middle market companies.
Michelle Moloian is a director and leader of Baker Tilly’s unclaimed property compliance practice. She has more than 30 years’ experience in private industry and public accounting and is responsible for the annual filing of thousands of unclaimed property reports for Fortune 500 and middle market companies.
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