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How would you fare in a Customs Audit?

Home Resources How would you fare in a Customs Audit?

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Suppose you were to get a notice from Customs that you are to be audited. Would you be ready? Many importers leave compliance to their broker, but this can be a recipe for penalties if they’re faced with an audit.

Importers may not realize that they are ultimately responsible for missing information or errors in their customs compliance process. Any penalty arising from an audit is issued to the importer, not the broker.   The importer would also be responsible to correct past transactions based on Customs final audit report.

What can you do to avoid potential failed audit? Prepare yourself by conducting an internal review. Start with the following questions:

Are my goods being classified correctly?

Classification is determined by understanding the goods being imported and interpreting the Harmonized Tariff Schedule correctly. This determines the import duties, but with thousands of potential classifications in the US and Canada, this can be a rather complex process.

In order to properly classify a good, it’s important to know as much as possible about it.

For example, let’s say you are importing a type of knife and must classify it. The duty rates for knives range from 5% to 11%.  If the commercial invoice only say’s ‘knife’, your broker should be asking you clarifying questions like whether its serrated or not, what it will be used for or whether it has a fixed blade. These details all affect the how it is classified.

If your broker isn’t trying to understand as much as they can about the good you’re importing, how can the correct classification be determined?

Am I reporting the value of merchandise correctly?

This is an important area of focus for customs compliance. The importer must declare a value for the imported merchandise. This declared value directly impacts how much duty is paid.

There are specific rules and methods for valuation, the most common of which is transaction value. For customs purposes, the value is not just price paid for the good. Non-invoice payments such as royalties, R&D costs, commissions, assists, and some transportation costs must be added to the customs value of that good.

There is a higher degree of scrutiny to related party sales as the onus is on the importer to prove that the relationship did not influence the price and other valuation methods can be used if the consignee has not purchased the merchandise.

Misdeclarations of relationship, valuation errors, and value underreporting can go undetected for years, leading to substantial underpayment of duties. If uncovered during an audit, this could result in significant costs including repayment of duties and taxes outstanding, not to mention potentially severe penalties.

Are my NAFTA or other Free Trade Agreement certificates being applied properly?

Free Trade Agreements (FTAs) such as NAFTA are a great way to take advantage of duty reductions or elimination. That being said, if your goods qualify for a preferential trade agreement, you must ensure that you have a valid Certificate of Origin from your vendor at the time of importation. This means making sure all required fields are filled out correctly and it is signed by the exporter or producer.

An importer or exporter has the legal duty to analyze its product’s FTA eligibility correctly before claiming duty reduction or issuing a Certificate of Origin. Compliance with any given FTA requires an understanding of the law and its application to your good. One misstep can be costly, both in duties and penalties.

Are you reporting the correct country of origin?

Unless an exception applies, all products must be marked with the country of origin. Each imported product can only have one country of origin and the importer has the burden of ensuring that the country of origin is correct. Origin is important for determination of import duties as well as for providing accurate information to Customs.

Another related question to ask is: Are you utilizing a Free Trade Agreement like NAFTA? If so, these agreements often have Special Rules of Origin that you must qualify for in order to take advantage of that FTA status. The good may be required to contain a specific percentage of content in the participating country. Or, in the case of an assembled product, you must determine if a “substantial transformation” has occurred. For example, an unfinished product is shipped from Country A to Country B, where it is assembled or used in production.  If the production in Country B is enough to substantially “transform” the item into a new product, that new product is now a product of Country B.

If your products are being assembled in multiple countries, do not assume that country of export is the country of origin. Perform country of origin analysis to ensure your suppliers are declaring the correct origin.

Are you in compliance with customs recordkeeping requirements?

Prior to an audit, Customs will request specific documentation to support the import of your goods. You must be confident that you have retained all required documentation relative to valuation, applicable free trade agreements, classification, or rate of duty, whether or not Customs required their presentation at the time of entry.

Regulations require that records must be kept for 7 years – 6 years plus the current year. If asked, could you produce documentation from an entry that occurred six years ago? How quickly and easily could you locate them? Customs will advise their expected date of receipt for all requested documentation.  You must comply within that time frame or penalties will apply.

Recordkeeping penalties can be significant, with maximum penalties varying by whether the failure is due to negligence (the lesser of $10,000 or 40 % of the value for each release of merchandise) or willfulness ($100,000, or 75% of the value). Implementing a Customs recordkeeping compliance program will help to reduce or eliminate recordkeeping penalties.

Prepare Yourself – Get Professional Help

Review the above areas and make sure you have strong customs and trade policies and procedures in place. They should be periodically reviewed to ensure they are up to date with current regulations.

Have an audit performed by a customs consultant. An independent, objective assessment can provide a better perspective on your company’s true customs audit readiness. An audit by a Farrow Trade Consultant would include a review of your current processes, identifying compliance gaps and potential risk areas, as well as areas for improvement. Doing so will better prepare you should you be flagged for an audit.

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