Academic journal article Journal of Accountancy

The Truth about Customs

Academic journal article Journal of Accountancy

The Truth about Customs

Article excerpt

Important information for CPAs involved in international trade.

Big companies used to be the only entities to conduct business internationally. No longer. Fierce competition at home, the prospects of new opportunities overseas and a surge of trade liberalization initiatives, such as the Customs Modernization and Informed Compliance Act, the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT), are forcing small and midsize companies to look across borders to market and sell their products and services.

However, the increased import and export opportunities have exposed more companies to customs penalties. In fact, smarter companies already are considering customs duties "manageable taxes" that they must plan for. Consequently, CPAs who work with import or export companies must be better informed about customs and international trade practices. This article provides CPAs who manage, audit or review international companies with information on how customs procedures affect the bottom line, how to identify potentially costly customs problems and how to minimize and manage US. Customs Service intervention.


The modernization act is a wide-ranging U.S. law that dramatically changed the relationship between the U.S. Customs Service and international traders. It has streamlined and automated US. customs procedures for processing import transactions, shifting the focus of compliance efforts from prerelease merchandise and document examinations to postentry audits and reviews. For example, a typical shipment may not be highly scrutinized upon entry to the United States. However, after entry, customs could audit the importer's books and records to ensure die information provided to them was accurate and complete--an enforcement strategy similar to that of the IRS.

The act requires traders to exercise "reasonable care" in the entry, tariff classification, product valuation and marketing of imports. To satisfy this standard of care, the US. Customs Service expects all importers to adopt management systems that ensure import and export compliance is a priority. That includes strict recordkeeping procedures, internal reviews and consultations with outside experts to detect and remedy violations.

Along with drastically changing the importer's compliance obligations, the modernization act provides stiff penalties for companies failing to meet its new standards. For example, civil customs penalties may be as high as the domestic value of any imported merchandise. In addition, the modernization act provides for specific recordkeeping penalties of up to $10,000 per violation when an importer fails to exercise reasonable care in maintaining records such as purchase orders, invoices or receiving reports. These penalties may be assessed even if there are no errors on the underlying documents and may be doled out in addition to the general penalties.

Finally, to verify that importers are taking their new obligations seriously, U.S. customs auditors are scrutinizing more companies. In fact, customs has announced that it intends to audit over 1,000 companies by the year 2000. If an official customs audit discloses a lack of reasonable care, such as when the company's internal controls do not provide sufficient oversight, the company can be subject to the civil and criminal penalties. just as significant, if not more so, the Customs Service will target that company for intense examination of future shipments, resulting in major monetary costs and delays in delivering imported goods to customers. If all that wasn't enough, Congress recently named Raymond Kelly, the former police commissioner of New York City, to be the Custom Service's new commissioner.


Any CPA associated with a business that is involved in importing or exporting should be aware of all potential customs issues:

Controllers, tax directors and CFOs must plan and structure international transactions to avoid penalties and minimize customs duties just as they plan for income taxes. …

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