Why record quality matters more than ever in unclaimed property audits

Editor: Rochelle Hodes, J.D., LL.M.

States today are under increased pressure to find new sources of revenue. For many states, enforcement of unclaimed property laws has proved to be a productive source of additional revenue. Although these rules do not constitute a tax in the traditional sense, compliance often sits within a company’s tax function.

In recent years, state unclaimed property audits have become increasingly complex, not only because states are devoting more resources to enforcement but also because states often evaluate company records differently. While companies often focus on identifying reportable property and satisfying filing obligations, a less obvious risk frequently drives audit results: the quality and usability of company records. For more background on unclaimed property requirements, see Kane et al., “10 Answers to Common Unclaimed Property Questions,” Insights, Crowe (Nov. 12, 2025).

A company’s records determine whether property can be sourced to a particular state; whether auditors will rely on actual transactions or estimation methodologies; and, increasingly, whether multiple states may assert competing claims to the same property. The challenge is compounded by the fact that states do not always apply the same standards when evaluating records. Information that one state considers sufficient to establish an owner’s location may be rejected by another state as incomplete or unusable.

Record quality can affect audit assessments, reserve calculations, penalty exposure, and a company’s ability to defend against overlapping claims. Understanding how states evaluate records — and proactively improving those records — has become an essential component of unclaimed property risk management.

Unclaimed property and why records matter

Unclaimed property laws generally require businesses holding property belonging to another party to transfer that property to the appropriate state after a specified period of owner inactivity, commonly referred to as a dormancy period. Common examples of unclaimed property include uncashed payroll and accounts payable checks; unresolved customer credits, rebates, and securities; and unidentified remittances.

States take custody of abandoned property as custodians until the owner or the owner’s heirs come forward to claim it. Because unclaimed property generates significant revenue for many states, compliance is actively enforced through audits, voluntary disclosure programs, and other enforcement initiatives.

The legal framework governing which state may take custody of abandoned property derives largely from a series of U.S. Supreme Court decisions, including Texas v. New Jersey, 379 U.S. 674 (1965), and Delaware v. New York, 507 U.S. 490 (1993). Under those priority rules, the first right to claim abandoned property generally belongs to the state of the owner’s last–known address, as reflected by the books and records of the business holding the property (the holder). If the holder’s records do not contain an owner address or the last–known address is in a state whose laws do not provide for escheat, the right to claim the property generally shifts to the holder’s state of incorporation.

The Supreme Court’s priority rules were intended to prevent multiple states from claiming the same property. In practice, however, those rules depend on the quality and usability of the holder’s records. Before a state can apply the priority rules, it must determine whether the holder’s records contain sufficient information to establish the owner’s location. It is at this stage that states often apply different standards.

What are ‘complete’ and ‘researchable’ records?

One of the most common disputes in unclaimed property audits involves whether a company’s records are “complete” and “researchable.” These concepts are important because they often determine whether a state will rely on actual transactions or use an estimation methodology to calculate liability. While there is no universally accepted definition of these terms, Delaware provides a useful framework for discussion.

Under Delaware’s unclaimed property regulations, a holder generally is expected to maintain complete and researchable records covering, at a minimum, seven to eight years preceding the examination notice (12 Del. Admin. Code §104–2.20.1 (authorized by Del. Code tit. 12, §1132)). Delaware’s record–retention statute, however, requires holders to retain records containing information necessary to establish compliance with the Delaware Escheats Law for 10 years after the date a report is filed, unless a shorter period is provided by the state escheator by rule or regulation (Del. Code tit. 12, §1145(a)). Holders who are under examination or have entered into an unclaimed property voluntary disclosure agreement must retain until the end of the exam, voluntary disclosure agreement review process, or any related appeal or litigation records to the present day for 10 years plus the applicable dormancy period (Del. Code tit. 12, §1145(b)).

Depending on the property type, applicable dormancy periods generally range from three to five years. As a practical matter, Delaware examinations and voluntary disclosure agreement reviews frequently encompass at least 10 years plus the applicable dormancy period, which may extend the period under review beyond the minimum seven– to eight–year period referenced in the regulation. This distinction is important because a holder may possess records that satisfy Delaware’s minimum definition of “complete and researchable” records for a portion of the examination period while lacking records for earlier years that remain subject to review. Those gaps often become the basis for estimation methodologies.

Delaware defines complete records as records that reconcile to the holder’s general ledger, recognizing that immaterial differences may occur (12 Del. Admin. Code §104–2.20.2). It defines researchable records as records through which the holder can research the resolution of an item (id.). At a minimum, researchable records must contain the owner’s last–known address (id.).

These definitions highlight two important principles:

First, record quality is not simply a question of whether information exists somewhere within the organization. Records must be sufficiently reliable to reconcile to the company’s books and records.

Second, records must contain enough information to allow a holder — and ultimately a state auditor — to determine where property should be reported. Owner address information is therefore critical because it determines whether property can be assigned to a particular state under the Supreme Court’s priority rules.

When records do not meet a state’s standard for completeness or researchability, auditors frequently conclude that owner–state sourcing cannot be established. In those circumstances, states often rely on estimation methodologies or assign property to the holder’s state of incorporation.

Different record standards can produce overlapping liability

Although the Supreme Court’s priority rules are uniform, state standards for determining whether a holder possesses a usable owner’s address are not. The contrast between Illinois and Delaware illustrates the issue:

Illinois has adopted the Revised Uniform Unclaimed Property Act’s broad definition of a “last–known address” (765 Ill. Comp. Stat. 1026/15–301(1) (2025)). Under Illinois law, a last–known address includes “any description, code, or other indication of the location of the apparent owner which identifies the state,” even if that information is not sufficient to deliver first–class mail to the owner (id.). Illinois further provides that a ZIP code associated with an owner may establish the owner’s state when the ZIP code corresponds to an Illinois post office and other records do not indicate a different state (765 Ill. Comp. Stat. 1026/15–301(2) (2025)).

Delaware applies a considerably narrower standard. To establish owner priority, Delaware generally requires at least two of three nonconflicting data points: a city, a state (or foreign country code), and a postal code (12 Del. Admin. Code §104–2.8). Delaware further provides that the location of a transaction is not evidence of the owner’s last–known address (id.).

As a result, the same record may be treated differently depending on which state is evaluating it.

For example, assume a company holds unclaimed property and its records contain only an owner’s ZIP code. Illinois may conclude that the ZIP code is sufficient to establish an Illinois owner address and therefore assign the property to Illinois under the first–priority rule. Assume that Delaware concludes that the same record does not contain sufficient owner address information because only one of the required address elements is present. As a result, if the company is incorporated in Delaware, Delaware may treat the property as address–unknown property and assert liability for the unclaimed property in Delaware under the secondary priority rule applicable to the holder’s state of incorporation.

The holder is then left attempting to reconcile competing state positions regarding the same underlying property. The issue becomes even more complicated when estimation methodologies are involved.

When a state unclaimed property auditor determines that a company’s records are incomplete or not researchable, they frequently use estimation techniques to calculate liability. Although methodologies vary, estimation generally involves reviewing years with usable records, calculating an error rate or liability ratio, and extrapolating that amount across years for which records are unavailable or considered deficient.

Suppose Delaware rejects certain records as insufficient and uses that conclusion to support an estimated assessment. The company may pay the assessment, settle the matter, or establish financial accounting reserves based on that liability (FASB ASC 450, Contingencies, particularly ASC 450–20–25–2 (loss contingency accrual standard)).

Assume that later, Illinois reviews the same underlying records and concludes that they are sufficient to identify actual owners within its jurisdiction. Illinois may then assert liability for specific transactions covering the same period already assessed by Delaware using estimation.

Although states generally recognize that property should not escheat twice, there is no universal administrative process requiring states to coordinate competing claims. As a practical matter, holders often must establish that overlap exists and seek offsets, credits, or other relief through audit negotiations, administrative appeals, settlement discussions, or litigation. The cost of proving overlap may itself become significant and often results in audit impasses that can drain both internal and external resources.

Consequently, what begins as a disagreement regarding record quality can evolve into a dispute regarding duplicate liability.

Additional consequences of poor records

The risks associated with incomplete or inconsistent records extend beyond overlapping liability.

First, poor records increase the likelihood that states will rely on estimation methodologies. Estimated assessments often cover lengthy lookback periods and can produce significantly larger liabilities than assessments based solely on identified property.

Second, poor records may increase penalty and interest exposure. Many states impose penalties for failure to report property, failure to maintain records, or failure to comply with audit requests. When penalties are applied to estimated assessments, the resulting exposure can be substantial.

Third, record deficiencies create accounting challenges. Companies evaluating unclaimed property exposure under ASC 450 may find it difficult to determine whether reserves adequately reflect potential liabilities, especially when different states may reach different conclusions regarding the same records. ASC 450 governs accounting for contingent losses. Under ASC 450–20–25–2, a liability generally must be accrued when a loss is probable and reasonably estimable; disclosure may be required when a loss is reasonably possible.

Finally, inadequate records increase audit costs. Tax, accounting, treasury, legal, and compliance personnel often spend significant time responding to state unclaimed property information requests, locating historical records, reconciling data, and defending sourcing positions. These internal costs can be considerable even before any assessment is taken into account.

Practical steps for record review and remediation

Because record quality plays such an important role in audit outcomes, companies should take the following proactive steps to evaluate and, where needed, remediate their records now to be ready in case they are selected for an unclaimed property audit:

• Identify what historical records exist, where they reside, and whether they remain accessible. This review should include legacy systems, acquired-company records, treasury systems, payroll systems, accounts payable/receivable systems, and archived files.
• Assess the completeness of owner address information across major property types. Missing address information is one of the primary drivers of estimation exposure and state-of-incorporation liability.
• Where feasible, consider data remediation, including customer master-file reviews, address-matching initiatives, and reconciliation of information maintained across multiple systems.
• Not every historical deficiency can be corrected. When limitations exist, companies should document what information is available, what information is missing, and what efforts have been undertaken to remediate those issues. Such documentation can be valuable during discussions regarding sourcing positions and estimation methodologies.
• Coordinate audit positions within an organization. Unclaimed property audits frequently involve tax, accounting, treasury, legal, payroll, accounts payable/receivable, and compliance personnel. These groups should maintain a consistent understanding of how company records are being characterized. Statements made early in an audit regarding allegedly incomplete or unresearchable records may affect later efforts to argue that those same records support owner-state sourcing.
• Carefully track situations in which one state rejects records while another state relies on similar information to establish the owner’s location. Maintaining documentation regarding audit populations, settlement periods, estimation methodologies, and remediation efforts may help support future offset or credit claims if overlapping liability issues arise.
• Review and, where appropriate, improve recordkeeping practices. Consistent address-capture procedures, centralized data governance, documented retention policies, and regular reconciliation processes can significantly reduce both estimation risk and future audit costs.

Review, documentation, and remediation critical

The Supreme Court’s priority rules were designed to provide a uniform framework for determining which state is entitled to custody of abandoned property. However, those rules depend on a threshold determination that is often anything but uniform: whether a holder’s records contain sufficient information to establish the owner’s address.

As the contrasting approaches of Illinois and Delaware demonstrate, states may apply very different standards when evaluating the same records. Those differences can affect sourcing decisions, support estimation methodologies, and create the potential for overlapping liability when multiple states assert competing claims to the same property.

For companies and their advisers, record quality is no longer merely an administrative concern. It is a critical factor in determining unclaimed property audit outcomes, reserve exposure, and overall compliance risk. Organizations that proactively review, document, and remediate their records will be better positioned to reduce exposure, defend against duplicate claims, and manage increasing state enforcement efforts.

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Editor

Rochelle Hodes, J.D., LL.M., is principal with Washington National Tax, Crowe LLP, in Washington, DC.

For additional information about these items, contact Hodes at Rochelle.Hodes@crowe.com.

Unless otherwise noted, contributors are members of or associated with Crowe LLP.