If you import into the U.S., the risk of being audited by U.S. Customs and Border Protection (CBP) is growing. In 2023, CBP completed 435 audits, collecting USD $114.5 million in penalties from audited companies. Those companies also paid their staff for many hours of data gathering and analysis, and also forked over hefty fees for attorneys to help them respond to CBP requests. All importers to the U.S. would agree: CBP audits are a good thing to avoid. Let’s review how you can do that.
Audit Risks
Most U.S. taxpayers have not been audited by the IRS. Likewise, most U.S. importers have not been audited by CBP, but the risk is there, nonetheless. That’s because Americans import a lot – USD $3.35 trillion in 2022 – and Congress puts lots of pressure on CBP to make sure the right duties are collected, and all the bad stuff (counterfeit goods, drugs, firearms, etc) is kept out of the country. CBP audits are used to ensure regulations are followed and companies pay the right duty amounts.
As covered in our article Global Trade Compliance: Understanding the Basics, CBP uses audits to protect the revenue owed to the U.S. and as a deterrent to future violators. So, any issues they find during an audit can result in huge fines, a significant worry for any importer. Fines can range from $10,000 per entry for record keeping infractions to $100,000 for willful violations, and even the loss of import privileges in extreme cases. And don’t forget the profit-sucking hidden costs of an audit – the endless hours your staff would spend managing the CBP audit.
The downside risks are significant, so it makes sense to do some extra due diligence to make your business audit-proof.
Different Kinds of Audits
Not all audits are created equal.
Audit surveys, the least invasive CBP audit, take a quick look into a specific area of your import operations to assess risk. At the end of these audits, CBP does not provide feedback, but can flag you for a full audit if they uncover concerns.
CBP also performs Quick Response Assessments (QRAs) to check for a specific issue in a company’s import transactions. These are usually targeted at high-risk trade issues like 301 tariff avoidance. At the end of these audits, CBP will let you know whether you have an acceptable or unacceptable level of risk in your import program.
Focused Assessments (FAs) are CBP’s most comprehensive audit. This is the audit you lose sleep over. It evaluates an importer’s total compliance risk. It begins with a Pre-Assessment Survey (PAT), where the importer’s records, including financial records, are reviewed. If CBP discovers a lack of internal controls or other compliance concerns, it will perform a deeper dive through Assessment Compliance Testing (ACT).
Who is at Greatest Risk for a CBP Audit?
CBP has limited resources, so it takes a risk-based approach to audits. The agency may target a company it believes is potentially unlawful, or one that’s made errors in the past. Your chances for a CBP audit increase if you’re bringing in commodities considered high-risk for improper duty declaration (like apparel) or goods from a high-risk origin point (like certain regions of China).
It’s not just larger importers that are on CBP’s radar screen for audits. In fact, many large importers are members of special CBP trade compliance programs, like the CTPAT Trade Compliance Program, that mostly exempt them from audits. Small and medium-sized importers can be targeted for audit, and technology is making it much easier for CBP to identify unintentional or willful non-compliance. Using big data and AI tools, the agency can analyze thousands of documents in seconds to flag paperwork anomalies.
How to Audit-Proof Your Business
There’s no way to completely avoid audits as some are merely random, but here are steps you can take to lower your risk for a CBP audit and stay compliant:
- Remember: it’s your job, not your broker’s. CBP regulations put the burden of reasonable care on the importer, so be sure you’re giving Customs compliance the proper amount of attention. Often this critical function is a part-time role for people whose primary responsibilities may be logistics, purchasing or finance. In such cases, details can be missed that can make your company more vulnerable to a CBP audit.
- Follow the law. It may sound simple, but doing things the right way from the outset will mitigate the risk, pain and financial impacts of an audit. Create rules – a compliance guide – and follow them. Ensure your team does things the right way, every single time.
- Use the right HTS code. CBP is using AI to look for inconsistencies between your documentation, public data, and the HTS code (and other data elements) on your Customs entries. If you’re using a different HTS code than most of your competitors for the same product, it’s also going to trigger a signal. Be certain your HTS codes are right and get help from the experts if you’re not sure.
- Always use the same HTS code for a product. Any changes are flagged in CBP’s systems that something might be wrong. Keep a product code list and share it with your customs broker to ensure consistency. If your trade compliance processes are largely manual, automating trade compliance can be a worthwhile investment.
- Adopt strong recordkeeping practices. Your records should let you easily tie your Customs entries to your financial records. Be sure to declare the value of all the inputs to your products in the value you give to CBP, including molds, tooling and packaging.
- Be aware of CBP’s Priority Trade Issues. If you are importing a product subject to one of these, you are at higher risk for audit. Be sure you follow the rules, have all the necessary documentation, and get help from a trade compliance expert, like Dimerco’s customs brokerage team, if you need it!
- Be sure the country of origin you declare is correct. If you claim free trade or trade preference programs, you are at higher risk for an audit. Example: importing the same product today from Mexico when it was always imported from China can raise a flag. Have the required documents to back up your country of origin claims.
- If you spot a mistake, proactively alert CBP. This gives you a legal edge against future penalties. There are lots of options here. Consult with a trade compliance expert to find the right one for you.
- Conduct your own internal reviews and audits. Sure, it’ll take a little time. But it’s much less painful for you to identify your own problems than for CBP to do it for you.
- Train your team. Even some general trade compliance learning across your organization builds a team of folks collectively looking out for your company’s interests.
Customs Experts Can Help You Avoid CBP Audits
U.S. Customs regulations are complex. Large companies have departments dedicated to nothing but understanding these regulations and ensuring compliance. But most importers don’t have the resources to do that. In such cases, it could make sense to get guidance, on a part-time basis, from a Customs expert or your Customs broker. They can analyze your current trade compliance strategy and processes and, by applying best practices, suggest steps you can take to audit-proof your business.
Do you need to assess your company’s trade compliance practices? Reach out to Dimerco’s customs brokerage and trade compliance team and lets start a conversation.
