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U.S. Customs Proposes Formal Regulations
Requiring Use Of Statistical Sampling For Large
Audits And Prior Disclosures And Use Of Offsets
During Audits

October 21, 2009

U.S. Customs and Border Protection (CBP) published in the October 21, 2009 Federal Register a proposed amendment to its regulations, providing guidance for the use of statistical sampling in CBP audits and prior disclosure cases. The proposed regulations also provide guidance for the offsetting of overpayments and over-declarations when an audit involves a calculation of lost revenue or monetary penalties under 19 U.S.C. 1592.

The proposed change is intended to reflect in the regulations the use of statistical sampling methods as the most practical and expeditious way to accurately assess the voluminous number of entry transactions often encountered in audits in the modern commercial importation environment.

Statistical sampling is a recognized method of selecting a limited number of transactions for review and analysis. The results of the findings are then extrapolated from the smaller number of entries/transactions actually examined (the sample transactions/entries) over the larger universe of entries/transactions encompassed within the time period and scope of the audit.

There are several different methods of statistical sampling employed by CBP, including variable sampling (both physical and dollar unit sampling) and attribute discovery sampling.  Additional information on CBP’s statistical sampling program may be found on our website at:

Exhibit 6A Sampling Technical Guide (10/31/2004)

Exhibit 6A (Appendix I) Sampling Steps (10/31/2004)

Exhibit 6A (Appendix II) Sampling Methodology Diagrams (10/31/2004)

Exhibit 6A (Appendix III) Sampling Methodology Table  (10/31/2004)

Exhibit 6A (Appendix IV) Sampling Plans  (10/31/2004)

Other audit tools may be found at: http://www.cbp.gov/trade/programs-administration/audits/focused-assessment

Use Of Statistical Sampling In “Self-Testing” & Prior Disclosures

A private party conducting its own “self-test” in connection with a section 1509 Customs Audit must use a statistical sampling plan that has been reviewed and approved by the CBP audit team.

With respect to prior disclosures, the proposed regulations provide that the private party may employ statistical sampling in this review and calculation.  The private party’s review and calculation, including the time period and scope of the review, the sampling plan, and the sampling plan’s execution, are subject to CBP review and approval. A prior disclosure will only be approved (or considered perfected) when the sampling plan and its execution are approved by CBP.

More specifically, the proposed changes provide:

  1. CBP has the sole discretion concerning whether to employ statistical sampling in any given case, authorize a person being audited to perform self testing and use statistical sampling, or accept the statistical sampling used by a private party conducting an independent review and calculation of lost revenue in a prior disclosure case.
  2. During the audit, at the opening conference (or thereafter in those instances where self-testing is authorized by CBP at some point after the conference), CBP will explain the sampling method and how the sampling results would be applied in determining lost revenue and overpayments (see the following section for discussion of offsets for overpayments). An audited person, including one employing self-testing, who accepts the sampling plan also waives its ability to challenge the validity and methodology of the sampling plan at a later date. Having accepted the sampling plan, the audited person is limited to challenging only alleged computational or clerical errors. Once CBP approves the specifics of the sampling plan, and the person being audited agrees to waive its ability to challenge the validity of the sampling plan at a later date, the audit (or self-testing) may proceed in accordance with that plan. CBP’s authority to conduct the audit or to employ sampling is not dependent on the audited person’s acceptance of the specifics of the sampling plan.

Use Of Offsetting To Identified Over And Underpayments Or Quantities

Prior to an amendment of section 1509(b) by Trade Act of 2002, the “finality of liquidation” rule (19 U.S.C. 1514) precluded offsetting when CBP issued a claim for lost duties, taxes, and fees under 19 U.S.C. 1592(d).

Following an amendment to section 1509(b) by Section 382 of the Trade Act of 2002 (the Act; Pub. L. 107-210, 116 Stat. 933 (2002) offsetting was allowed under certain circumstances. CBP’s proposed rule identifies five conditions under which it will take into account overpayments of duties and fees and over-declarations of quantities or values when calculating loss of duties, taxes, or fees (referred to as “loss of revenue” in the statute) and monetary penalties levied under section 1592. These are:

  1. The overpayments or over-declarations are identified by CBP during an audit (review or examination) conducted by CBP under section 1509(b);
  2. The audit was completed on or after August 6, 2002, the effective date of the Act;
  3. The overpayments or over-declarations relate to liquidated entries;
  4. The overpayments or over-declarations are identified by CBP as having been made within the time period and scope of the audit as defined by CBP; and
  5. The overpayments or over-declarations are determined by CBP not to have been made for the purpose of violating any provision of law, including the Customs laws and laws enforced by other agencies, including but not limited to, the Internal Revenue Service.

CBP notes that offsets may be permitted where the overpayments were not made by the same acts, statements, or omissions that caused the underpayments; nor are such overpayments or over-declarations limited to having occurred on the same entry or entries that evidence the underpayments or under-declarations. Offsets, however, will not be allowed for duties paid on goods for which a duty allowance or preference was not timely claimed or established at the time of entry or within the time allowed after entry under applicable law or regulation.

Finally, CBP proposes that while overpayment may be used to offset underpayments, it will not issue refunds unless the transaction in question otherwise qualifies under 1520 or 1514, and the importer has followed the appropriate procedures to obtain such refunds.

To obtain offsets, the review must be conducted under the auspices of a section 1509(b) audit. CBP notes that it may allow the offsets when self testing is performed during the 1509 audit, when the self test is subject to the CBP auditor’s review and approval. Offsets would specifically be precluded when the review is conducted by an agent, import specialist, or inspection officer in the performance of his/her duties. It would also preclude consideration of offsets for Prior Disclosure.

A copy of the proposed rule may be obtained at http://www.tuttlelaw.com/customs_material/e9-25222.pdf.

CBP is soliciting comments on the proposed rule from interested parties. The comment period closes 60 days from the date of publication, unless extended.

For assistance or additional information, please contact George Tuttle, III at (415) 986-8780 or geo@tuttlelaw.com.

George R. Tuttle, III is an attorney with the Law Offices of George R. Tuttle in San Francisco.

The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.

Copyright 2009 by Tuttle Law Offices.

All rights reserved. Information has been obtained from sources believed to be reliable. However, because of the possibility of human or mechanical error by our offices or by others, we do not guarantee the accuracy, adequacy, or completeness of any information and are not responsible for any errors, omissions, or for the results obtained from the use of such information.

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