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Problems with Contingency Fees in Unclaimed Property Audits

The use of contingent fee auditors by states and localities has been a controversial issue in recent years. On November 9th, 2015, the Massachusetts Legislature’s Joint Committee on State Administration and Regulatory Oversight heard testimony on Senate Bill 1710, a bill that would ban the use of contingent fee auditors by state agencies, including the Massachusetts Department of Revenue. Contingent fee auditors get paid a fee which is dependent on the amount of tax (or unclaimed/abandoned property) collected based on their audits.

The Associated Industries of Massachusetts, represented by Brad MacDougall, pinpointed frequent problems created by the use of contingent fee auditors by Massachusetts and other states during abandoned property audits, and how those issues create the impression that states that use contingent fee auditors are not business friendly.

Earlier, On October 26, 2015, the Kemper Life Insurance Companies filed a lawsuit against the Illinois State Treasurer and private auditing firm, Verus Financial LLC, over the Treasurer’s unclaimed property audits of the Kemper Companies. In 2014, the U.S. Chamber Institute for Legal Reform issued a report (the “ILR Report”) addressing the concerns raised by life insurers. The ILR Report focuses on the financial incentives of the auditors and the troublesome searches imposed on life insurers. In view of the ILR Report, the Kemper litigation emphasizes the aggressive stance taken by the Illinois Treasurer and underlines the risk that contingency fees for unclaimed property audits will lead to mishandling by auditors pursuing private profit.

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