U.S. Customs and Border Protection ("CBP" or "Customs") determines the import compliance levels of importers through audits. Simultaneously, Customs audits are a highly effective revenue collection mechanism that ensure CBP promotes fair trade practices for American industry. The following article provides a general overview of customs audits and recent developments in this area.
While the term "audit" usually evokes a negative response due to its investigative nature, audits generally do not seek to report corruption. In fact, according to CBP, audits are conducted to collect data on a company and analyze the likelihood of noncompliance. CBP's audit procedure includes both a risk-assessment and a review of a corporation's internal controls. Customs audits include inspections of record keeping, internal controls and compliance, and a review of financial documents and import entries.
Initially, a customs audit begins with CBP selecting an importer using several selection criteria, such as the volume of the imports, use of specialized duty programs, amount of duties paid, and prior compliance history, among others. When CBP selects an audit candidate, it creates an extensive and detailed company profile that includes the company's background and customs history.
Brief Overview: Types of Audits
Focused Assessment
The most commonly known type of audit is the Focused Assessment ("FA").[1] The FA program contains two stages: Pre-Assessment Survey ("PAS") and the Assessment Compliance Testing ("ACT"). During the PAS, the auditor tests the sufficiency of the company's internal controls by reviewing customs entry records, select general ledger accounts, and foreign vendor payments. After reviewing the importer's financial transactions, the audit team creates a draft of the results. This draft assesses the internal controls of the company and produces specific conclusions reached as a result of the analysis of the company data.
CBP will only move to the second stage of the FA program if the audited company fails to meet adequate internal controls and compliance testing is necessary. In the ACT phase, the audit team will emphasize the areas in the company's internal controls that it believes are at risk of non-compliance. Then, the audit team will take new samples in each of these areas and reevaluate the compliance of each sample. CBP will then calculate the loss of revenue.
Quick Response Audits
Quick response audits ("QRAs") are a more recent development and are single-issue audits with a narrow focus. They take less time and are less cumbersome because their scope is much more narrow than the typical FA. According to CBP's website, these types of audits originate from referrals by CBP and Homeland Security offices utilizing risk management principles to identify specific companies involved in certain types of high risk transactions (e.g., ADD/CVD, valuation, classification, preferential treatment programs, etc.). Similar to the FA process, in a QRA CBP conducts interviews and walkthroughs of selected entries to understand the importing process. At the end of the audit, CBP will outline its findings in a written report with their determination of acceptable/unacceptable risk.
Notably, importers in the voluntary Importer Self-Assessment ("ISA") program are not included in the FA audit pool, but are included in QRAs.
Audit Surveys
A bit of a misnomer as it is technically not an audit, the audit survey is the latest development. An audit survey is a quick assessment of a company's operations with respect to a specific area of concern. According to CBP's website, the survey approach allows CBP to quickly and efficiently obtain onsite information about import activities relative to a specific trade area or issue without CBP and the import community committing substantial time and resources required by a full audit. Although the survey procedure is not an audit conducted in accordance with Government Auditing Standards, CBP does utilize similar audit risk assessment procedures (i.e., CBP will conduct interviews and walkthroughs of selected entries to understand the importing process.). After completing its survey review, Customs will not issue a formal report and will not provide a determination of acceptable/unacceptable risk or a level of compliance. Customs simply issues a "close out" letter.
Audit Notice and Process
Regardless of the type of audit that CBP is conducting, by law Customs is required to provide the importer advance notification and estimated duration. CBP will also schedule an entry conference, which will likely be the first in-person meeting with CBP. During the entry conference, CBP will discuss the audit's purpose, scope and duration. Prior to this meeting, CBP will likely send the importer a questionnaire eliciting information about the importer's internal procedures.
Customs conducts audits through statistical sampling and standard auditing techniques. The auditors review statistically selected import transactions from the company for the prior fiscal year and will compare the reported information to the company's internal records (i.e., commercial invoices, purchase orders, payment records, etc.). The auditors also select financial transactions to determine if certain transactions or costs were properly declared. For example, Customs reviews general ledger and chart of accounts to determine which accounts are used to record purchases or payments of imported merchandise, assists, supplemental payments, payments to agents, tooling, royalties related to production of merchandise, etc. Based on the results of this review, CBP will determine the compliance level (e.g., acceptable vs. unacceptable).
Upon completion of the audit, CBP will schedule a closing conference, at which time it will explain CBP's findings. CBP will provide a report to the importer stating whether the company was determined to be compliant with the Customs regulations. If non-compliant, CBP will ask the importer to create a plan outlining the corrective measures the company will take to increase compliance.
Note that serious violations may result in CBP referring the company for a formal investigation under 19 USC §1592, or other enforcement actions. As such, if violations are discovered at the outset of an audit it is always important for the importer to consider filing a Prior Disclosure ("PD") seeking legal protection from any potential penalties. If a PD is filed before the commencement of an investigation, or without knowledge of the commencement of an investigation, and the importer accounts and tenders the duties owed, the maximum penalty that CBP can levy is an amount equal to the interest on the unpaid duties.[2]
Customs law requires importers to exercise reasonable care to ensure that declarations made to Customs are true and correct. During a customs audit, CBP will evaluate an importer's internal controls and its import operations to determine the importer's overall compliance risk. The best way to prepare for a customs audit is to strengthen your import compliance procedures and internal controls. To that end, importers should conduct internal audits and risk assessments to determine which areas pose the highest risks for non-compliance.
Footnotes
[1] Specifically, CBP introduced the Focused Assessments Audit program officially in 2002 and made procedural changes to the FA program in 2014.
[2] 19 CFR 162.74 (2016).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
