On October 25, 2011, United States Customs and Border Protection (CBP) amended its regulations by adding provisions formally recognizing the use of sampling methods in CBP audits, as well as recognizing their application in voluntary prior disclosures. The new regulations also clarify the use of offsetting of overpayments and over-declarations during an audit. For a complete version of the Federal Register notice, click here. The rules will be effective December 27, 2011.

Drinker Biddle & Reath LLP’s Customs and International Trade team issued a client alert (click here to view) two years ago when CBP initially proposed these regulatory amendments. The final rule did not materially change the proposed rule, although CBP sought to clarify certain points in light of the comments filed, including: (1) requiring a party’s prior disclosure that utilizes statistical sampling methods to include an explanation of the sampling plan and methodology employed; (2) requiring a written waiver as evidence that a party accepted a sampling plan and methodology employed in an audit, or in certain circumstances relating to a prior disclosure; and (3) recognizing that CBP Regulatory Audit is responsible for review and evaluation of all prior disclosures submitted outside the context of an audit that seek to offset the over and under payment of duties.

Use of Sampling Methods

The amendments reflect both the industry’s and Government’s use of statistical sampling as the most practical and expeditious way to accurately assess large volumes of entries typically encountered during an audit or internal review. Statistical sampling is a recognized method for selecting a limited number of representative transactions for review and analysis. The results of the sampling review can then extrapolated over a larger universe of entries encompassed within the scope of an audit, internal review, or prior disclosure. Information on CBP’s use of statistical sampling methods during audits can be found within Exhibits 6 and 6A of CBP’s Focused Assessment (FA) Program documents on www. cbp.gov/xp/cgov/trade/trade_programs/audits/.

While CBP has used statistical sampling in its FAs when required to complete Assessment Compliance Testing and in other circumstances, the amended regulations now formally authorize its use in CBP audits and importer prior disclosures. Amended 19 CFR §163.11(c)(3) explains that sampling methods are appropriate: (1) where review of 100% of the entries/transactions is impossible or impractical in the circumstances; (2) where the sampling plan is prepared in accordance with generally recognized sampling procedures; and (3) where the sampling procedure is executed in accordance with the sampling plan.

As for prior disclosures, the regulatory amendments recognize past practice and legalize what many members of the trade industry have been doing for years when quantifying any potential loss of revenue for large-scale prior disclosure filings. Revisions to 19 CFR §162.74(j) now authorize the use of statistical sampling when disclosing the circumstances of a violation, provided the sampling method satisfies the audit procedures in §163.11(c)(3) noted above.

The prior disclosure must contain an explanation of the sampling plan and methodology, which are subject to CBP review and approval. The amended prior disclosure rule also states that when a party and the government have agreed to a sampling plan and methodology, the party submitting the prior disclosure cannot later contest the validity of the sampling plan and methodology. Moreover, if a party submits a prior disclosure using a sampling method, CBP reserves the right to review other transactions from the same time period and scope as that employed in the sampling method.

Several comments to the proposed rule were concerned that CBP would change its methodology during the course of an audit or work outside a sampling plan to examine other entries. In response, CBP confirms that it reserves the right to change its audit methodology if an auditor encounters circumstances, information, or problems that were unknown at the time of the creation of the sampling plan.

Other comments voiced concern about CBP’s addition of a waiver requirement when using the sampling method for an audit, requiring importers to agree in advance to the sampling and potential results. CBP confirmed that the waiver will only take effect when the audited entity accepts the sampling plan and methodology after discussing it with CBP auditors. CBP emphasized that the waiver is designed to avoid contention and delay that could result in disputes over the sampling plan and methodology following the conclusion of an audit. Importantly, however, the waiver is limited and a party would not be waiving its ability to raise substantive objectives it may have concerning the audit’s underlying findings, e.g., tariff classification determinations.

Use of Offsetting

The amendments to 19 CFR §163.11 also further clarify the use of offsetting in the context of audits and potentially prior disclosure filings. As provided in new § 163.11(d), when CBP auditors identify overpayments of duties or fees or over-declarations of quantities or values that are within the time frame and scope of the audit, they will treat the overpayments or over-declarations on finally liquidated entries as an offset to any underpayments or under-declarations also identified on finally liquidated entries. The offsetting benefit is subject to three conditions: (1) the identified overpayments or overdeclarations were not made by the person being audited for the purpose of violating any provision of any law; (2) the identified underpayments or under-declarations were not made knowingly and intentionally; and (3) all other requirements of paragraph (d) are met.

In a positive development, the new regulations also recognize the benefits of offsetting when sampling is utilized for completing a loss of revenue calculation in support of a prior disclosure filing provided all the requirements of § 163.11(d) are met and CBP approves the sampling plan. CBP Regulatory Audit will review and evaluate all prior disclosures and approve offsetting where it is satisfied that the relevant regulatory requirements are met.