A prior disclosure to CBP can be the way “out” of the serious penalties that await businesses and people who break (or try to bend) the customs laws when importing into the United States who do not exercise reasonable care in importing. In the case of negligent violations, a valid prior disclosure will reduce the penalty liability to the interest on the duty underpayment (if no duties were lost or the violations resulted from fraud, different rules and formulas apply; see below).
Some U.S. importers are tempted to save money by changing product tariff classification and invoice valuation, among others illegal practices. These illegal practices are considered by customs a “failure to exercise reasonable care” and can mean “1592 penalties” – named after 19 USC 1592, which is the law that prohibits these types of activities.
Timing of a Prior disclosure to Customs
The proper timing of a prior disclosure to customs of violations of 19 USC 1592 can help reduce or even eliminate penalties. It is called a “prior” disclosure because it is done before the disclosing party has knowledge of a formal investigation. CBP encourages importers to make a “prior disclosure” for violations of 1592.
A prior disclosure to customs should be made by an importer who is aware violations or potential violations, especially if they have been brought to their attention by CBP on a Request for Information form (CBP 28) or Notice of Action form (CBP 29).
Failure to be pro-active and disclose violations or potential violations, especially if CBP is asking questions, means you may not be able to take advantage of significant penalty reductions allowed for those who disclose violations prior to a Customs investigation.
How to Make a Valid Prior Disclosure to CBP
This “prior disclosure” process is a formal notice, usually in writing, made to Customs regarding the details and circumstances of a 1592 violation.
In order to make a valid prior disclosure to CBP, it must be done before, or without knowing, that Customs has begun a formal investigation into the potential violation. A prior disclosure can still have some benefit after a investigation has begun.
Also, if the amount of duty loss is known, you should tender any actual loss of duties, taxes and fees or actual loss of revenue to Customs. Because the issues that go into making a valid prior disclosure can be complex, and circumstances can be unknown, when properly done, a prior disclosure can be validly done without immediate payment of suspected duty loss.
Circumstances of Violations in a Prior Disclosure to CBP
The circumstances of violations in a prior to disclosure to CBP should be somewhat concrete, although an argument can be made that making a prior disclosure does not have to involve admitting there was a violation. The person making the prior disclosure must:
(1) Identify the class or kind of merchandise involved in the violation;
(2) Identify the importation or drawback claim included in the disclosure by entry number, drawback claim number, or by indicating each concerned Customs port of entry and the approximate dates of entry or dates of drawback claims;
(3) Specify the material false statements, omissions or acts including an explanation as to how and when they occurred; and
(4) Set forth, to the best of the disclosing party’s knowledge, the true and accurate information or data that should have been provided in the entry or drawback claim documents, and stat[ing] that the disclosing party will provide any information or data unknown at the time of disclosure within 30 days of the initial disclosure date. [ . . . ]
Prior disclosure benefits under 19 USC 1592
The prior disclosure benefits qualify the person making the prior to disclosure to substantial penalty reductions, or penalty elimination entirely (when only negligence is involved on unliquidated merchandise). In the case of negligence or gross negligence and liquidation has already occurred the penalty will be “the interest on any loss of duties, taxes and fees” “at the prevailing rate of interest” under the Internal Revenue Code. 19 CFR § 162.73(b)(2).
If the 1592 violation is a result of fraud and a valid prior disclosure to CBP is made, the penalty may be reduced from the equivalent to the domestic value of the goods and to only the amount of lost duties, taxes and fees, or if not duty loss, then just 10% of the dutiable value.
If you believe or have a question about whether you should make a prior disclosure to CBP, or have concerns about false representations, or omissions, made to Customs, it is in your best interest to consult with an attorney experienced in customs law and prior disclosures.
Please contact our office today at (734) 855-4999, or by visiting our contact page.