Wisconsin establishes rules for unclaimed property audits conducted by third-party auditors

Authored by Jordan Kohl and Colin Walsh

Many states contract with third-party auditors to administer unclaimed property audits. Third-party auditors primarily consist of law and accounting firms. These third-party audits are frequently adversarial and invasive, in large part because the third-party auditors have financial incentive to identity as much escheatable property as possible.

On April 3, 2018, Wisconsin enacted Assembly Bill 773, 2017 Wis. Act 235, which establishes when the Secretary of Revenue can use contingency fee agreements with third parties conducting unclaimed property audits. As in many other states, Wisconsin’s Department of Revenue has contracted, in recent years, with auditing firms to conduct unclaimed property audits on a contingency fee basis. Holders of unclaimed property have often criticized such arrangements, contending that such agreements incentivize these third-party firms to conduct overly aggressive audits and drive up compliance costs.

Under the new Wisconsin law, the restrictions on contingency fee arrangements for unclaimed property audits differ depending on whether or not the unclaimed property holder is domiciled in Wisconsin. For Wisconsin-domiciled holders, the Secretary of Revenue is prohibited from entering into an agreement allowing a third party to conduct an unclaimed property audit on a contingent fee basis or to purchase information arising from the audit, except for information received from the federal government. Such contingency fee-based arrangements can still be used for unclaimed property audits of holders domiciled outside Wisconsin. But the contingency fee for these arrangements is now capped at 12 percent of the total amount of unclaimed property disclosed by the audit.

Further, auditing firms can no longer use statistical sampling in order to estimate the property holder’s liability unless the holder consents to such an estimate.

The Wisconsin Department of Revenue currently does not have a formal voluntary disclosure agreement (VDA) process, but it is working to develop one. Despite the lack of a formal process, Wisconsin does waive penalties and interest for taxpayers who come forward to voluntarily disclose that they have not previously reported unclaimed property. The recent legislative changes are arguably holder-friendly; however, these changes signal increased audit activity in Wisconsin. As such, holders are well-advised to come into compliance as soon as possible.

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