Posted On March 14, 2022
Americans import a lot of stuff—and someone needs to make sure it’s all being taxed correctly.
According to the Office of the United States Trade Representative, the U.S. is the largest goods importer in the world, importing $2.5 trillion worth of goods in 2019.
U.S. Customs and Border Protection (also called CBP or simply Customs) uses audits to evaluate whether importers are meeting acceptable compliance levels. Through audits, the agency can uphold regulations and ensure that the appropriate revenue is being collected (as well as collaborate with other government agencies on issues around homeland security and immigration).
It may sound intimidating, and customs audits can certainly be complicated. They can also result in huge fines and consequences for importers that aren’t meeting risk standards. But with the proper preparation, companies can pass customs audits with flying colors.
First, let’s take a look at the different types of customs audits.
What are the different types of U.S. Customs and Border Protection customs audits?
In CBP’s own words, a customs audit “protects government revenue, provides informed compliance to the trade community while presenting a deterrent to future violators, protects domestic industries from unfair trade practices, and facilitates legitimate trade.”
But not all audits are the same.
Focused Assessment, Pre-Assessment Survey and Assessment Compliance Testing
The Focused Assessment Program, the most well-known type of audit, evaluates an importer’s risk of non-compliance. Focused Assessments have two stages, beginning with the Pre-Assessment Survey (or PAT), where the importer’s records, ledgers and foreign vendor payments are reviewed. If the results of the PAT show the company didn’t meet adequate internal controls, CBP will perform the Assessment Compliance Testing (or ACT). In those cases, the audit team will further scrutinize the areas it believes are at risk of non-compliance.
Quick Response Assessment
Sometimes, CBP will want to evaluate a specific issue. That’s where quick response assessments (or QRA) come in. These audits have a more specific scope and typically focus on companies involved in high-risk transactions. Similar to the FA process, at the end of a QRA, CBP will share its findings in evaluating an acceptable or unacceptable level of risk.
How to prepare for a customs audit
Passing a customs audit starts long before the audit begins. An importer’s internal controls team (management or other team members who work to ensure accuracy and compliance in regards to financial reporting and regulations) should essentially always be preparing. But what does it mean to prepare for a customs audit?
Keep an eye on import classification and taxation.
Among other things, audits review whether goods are classified correctly, and are therefore taxed appropriately. A customs broker will guide importers in determining the correct HS code for their specific product. (If this sounds simple, think again—the global classification system has more than 5,000 different codes. A tomato being imported to the U.S. could have a different code depending on the country of origin or the time of year it was harvested.)
Because CBP will be evaluating classifications, accurate HS codes for imports are vital. An online database can point you in the right direction, and you can review other cases to see how products similar to yours were classified. Misclassification can result in fines, so we recommend consulting with a customs attorney if you’re frequently importing complicated goods without a straightforward classification. The attorney can help you get a binding ruling with an accurate HS code. The process requires an investment, but can help you circumvent even bigger fines and fees later on.
Strong record keeping is key.
To determine whether a company is meeting customs compliance, CBP may request numerous types of documentation, including customs entry records (also called “entry packets”) for the imported merchandise. Typically, an entry packet includes the commercial invoice and valuation, packing list, bill of lading and customs history. Other documents a U.S. importer might need to provide could the importer’s financial transactions found in the general ledger.
Your customs broker should provide all of this documentation as imports clear customs and make it to their destination—and often, they’ll keep the records in case they’re needed later. But importers are responsible for keeping records for at least five years, and for being able to procure them in the event of a customs audit.
This is a common misconception, so it’s worth noting again: a customs broker isn’t responsible for providing records in the event of an audit. While customs brokers help ensure goods make it through customs clearance, it’s still the importer’s responsibility to make sure products are being classified correctly and duties are being paid.
A business can also complete an Importer Self-Assessment, a voluntary program that enables importers to review their internal compliance processes against CBP regulations to ensure compliance. This can be done on a formal level in collaboration with the CBP—or it can be a quarterly, semi-annual or annual exercise your company does internally to make sure it’s compliant and prepared.
What to do if you get audited
If you do get notice that your business is receiving an audit, the CBP auditor will give you a timeline and instructions for what to have prepared. You might only have a month to pull documents before turning them over to CBP. If your company has placed a high emphasis on maintaining accurate data and payment records, you should be ready and able to quickly pull documents.
CBP will also request information about how your business is organized and what department or teams handle documentation and risk assessment.
Sometimes, companies will realize they’ve made a mistake on an import. If that’s the case, it’s always better to let CBP know of the error versus waiting to see if they find it on their own. When a business submits what’s called a Prior Disclosure, which explains a violation of import laws and shows no malicious intent, CBP will likely hand down softer judgements than if the company tries to cover it up.
What happens after the audit?
Well, that depends on what CBP finds. If the audit uncovers misclassification of merchandise or an inability to prove compliance, the importer will likely receive a fine. At worst, the importer could lose its ability to import at all. If an unacceptable risk of non-compliance is found, the business is more likely to be audited again in the future.
In some cases, an audit will find that the importer paid too much in duties and taxes, and can receive a refund—although this doesn’t happen too often. An audit might also show that the company needs to update its compliance procedures. In that case, CBP might follow up to ensure those updates have been made.
If you want help reviewing import procedures, correctly classifying goods or upholding import compliance, we can help. Our team of customs brokers and international transportation experts can review your supply chain to provide cost-saving process improvements and suggestions. Contact us to get started.