Customs Audit

Suppose you get notification from Customs that you will be audited. Are you prepared for a Customs Audit? Many importers leave the day-today customs compliance task to their freight forwarders, but unless the forwarders is very experienced then this practice could lead to penalties in the event of a customs audit.

Importers may be unaware that they are ultimately liable for missing information or errors in the customs compliance procedure. Any penalties assessed as a result of an audit are levied against the importer, not the freight forwarder.

In addition, the importer would be accountable for correcting past transactions based on the Customs audit report’s conclusion.

What steps can you take to prevent an audit failure? You can get your business ready by doing an internal evaluation. Start by asking the following:

Are my goods classed appropriately?

Understanding the imported commodities and accurately interpreting the Harmonized Tariff Schedule determines classification. This sets the import duties, but with thousands of possible classifications in the United States and Canada, this may be a very complicated process.

To correctly classify a product, it is necessary to know as much as possible about it.

For instance, suppose you must classify a sort of knife you are importing. The knife duty rates range from 5% to 11%. If the commercial invoice merely lists “knife,” your broker should ask clarifying questions such as whether or not the blade is serrated, what it will be used for, and whether or not it has a fixed blade. These details all affect the classification.

How can the correct classification be determined if your broker is not attempting to gain as much knowledge as possible about the imported goods?

Am I accurately disclosing the worth of the merchandise?

This is an essential focal area for customs compliance. The importer must declare a value for the product being imported. This stated value directly influences the amount of duty paid.

There are certain standards and methodologies for valuation, with transaction value being the most prevalent. For customs reasons, the value is not simply the purchase price. Non-invoice payments such as royalties, R&D expenditures, commissions, assistance, and a portion of shipping charges must be included to the customs value of the product.

The onus is on the importer to demonstrate that the relationship did not influence the price, and alternative value methods may be employed if the consignee has not purchased the goods.

Relationship misdeclarations, valuation errors, and underreporting of value might be undiscovered for years, resulting in severe underpayment of duties. If discovered during an audit, this could result in substantial expenditures, including the recovery of unpaid duties and taxes, as well as potential severe penalties.

Are my NAFTA and other FTA credentials being applied correctly?

Free Trade Agreements (FTAs) like NAFTA are an excellent approach to benefit from duty reductions or elimination. Consequently, if your goods qualify for a preferential trade agreement, you must get a legal Certificate of Origin from your supplier prior to importing them. This involves ensuring that all relevant fields are complete and signed by the exporter or producer.

Before claiming tariff reduction or obtaining a Certificate of Origin, importers and exporters are required by law to examine the FTA eligibility of their products. Compliance with any given FTA necessitates knowledge of the applicable law and its application to your product. One error can be costly in terms of both duties and penalties.

Are you declaring the country of origin correctly?

Unless an exception exists, the nation of origin must be marked on all products. Each imported item can have only one country of origin, and it is the importer’s responsibility to ensure that the country of origin is accurate. Origin is essential for calculating import tariffs and submitting accurate information to Customs.

Another crucial point is whether or not you utilize a Free Trade Agreement similar to NAFTA. If so, these agreements frequently contain Special Rules of Origin that you must meet in order to qualify for FTA status. The product may be required to contain a certain proportion of local materials. Or, in the case of a constructed product, you must decide whether there has been a “substantial transformation.” For instance, a product in its unfinished state is delivered from Country A to Country B, where it is assembled or utilized in production. If the production in Country B is sufficient to “convert” the item into a new product, then the new product is a product of Country B.

If your items are assembled in various nations, you should not assume that the exporting country is the place of origin. Ensure that your suppliers are declaring the right country of origin by doing country of origin analysis.

Are you compliant with customs documentation requirements?

Customs will request certain documents to substantiate the import of your products prior to an audit. You must be satisfied that you have maintained all necessary papers pertaining to valuation, applicable free trade agreements, classification, and duty rate, regardless of whether Customs required their presentation upon entrance.

The regulations stipulate that records must be maintained for seven years, or six years plus the current year. If requested, could you produce documentation from a six-year-old entry? How fast and conveniently could you find them? Customs will indicate when they anticipate receiving the needed papers. You must comply within the specified time range or face fines.

Significant penalties may be imposed for improper recordkeeping, with maximum penalties changing depending on whether the failure was due to negligence ($10,000 or 40% of the value for each release of merchandise) or intent ($100,000 or 75% of the value). Implementing a compliance program for Customs recordkeeping will help reduce or eliminate recordkeeping penalties.

Prepare Yourself – Obtain Expert Assistance

Examine the aforementioned areas and ensure that robust customs and trade regulations and processes are in place. They should be evaluated routinely to ensure compliance with current rules.

Utilise the services of a TNETS Global trade consultant for a customs audit.

An impartial, objective assessment can provide a more accurate picture of your company’s readiness for a customs audit. An audit conducted by a TNETS Global Trade Consultant would include a review of your current procedures, the identification of compliance gaps and potential risk areas, as well as improvement opportunities. You will be better prepared for an audit if you take these steps.

Do you need Help? Get in touch.

Feel free to contact TNETS for information on any matter related to customs or trade compliance. We're here to help!