What Happens During a CBP Duty Drawback Audit?

U.S. Customs and Border Protection can review duty drawback activity through several different processes, ranging from document-based verification of individual claims to broader formal regulatory audits.

The scope of a review determines what CBP examines, but the central question is generally whether the claimant can substantiate the imports, exports or destruction, merchandise relationships, calculations, methodology, and other requirements supporting the drawback claimed.

Is Every CBP Drawback Review a Formal Audit?

No.

U.S. Customs and Border Protection (CBP) can review drawback activity in different ways. A claimant may receive a request for records related to a specific drawback claim without being subject to a comprehensive regulatory audit.

CBP's drawback offices may conduct document-based claim verification, while CBP's Trade Regulatory Audit organization conducts broader audits using a risk-based approach. Trade Regulatory Audit conducts both targeted audits and Focused Assessments.

The scope, formality, and documentation requested can therefore differ considerably from one review to another.

What Is a Duty Drawback Desk Review?

A Duty Drawback Desk Review is a document-based review in which CBP examines information supporting a drawback claim.

CBP may request records to verify matters such as:

• The drawback provision being claimed
• Designated imports
• Selected exports or destruction
• Merchandise identity or substitution
• The claimant's right to drawback
• Supporting transaction records
• Claim calculations

In a published drawback ruling, CBP described conducting a "full desk audit" and issuing a Request for Information to verify the drawback provision, selected exports, and the claimant's right to drawback.

A Desk Review should not automatically be treated as the same thing as a formal Trade Regulatory Audit. It is often focused on substantiating a particular claim or group of transactions.

What Is a CBP Trade Regulatory Audit?

CBP's Trade Regulatory Audit (TRA) conducts formal audits and other professional services involving compliance with U.S. trade laws and regulations.

CBP states that its audits generally have targeted objectives and use data analysis and risk-assessment procedures to determine scope. An audit may or may not include an assessment of the importer's internal controls, depending on its objectives.

Targeted Audits

A targeted audit generally focuses on particular compliance risks, transactions, programs, or areas identified by CBP.

For a company participating in duty drawback, the scope could include drawback activity when relevant to the audit objective.

Focused Assessments

A Focused Assessment is a more comprehensive CBP audit program that uses a risk-based approach to evaluate whether an importer represents an acceptable compliance risk to CBP.

A Focused Assessment is an importer compliance audit and should not be confused with a routine review of an individual drawback claim.

Why Might CBP Review a Duty Drawback Program?

CBP may review a drawback claim as part of its responsibility to verify whether the requested refund is supported by applicable law and documentation.

Broader Trade Regulatory Audits use risk-based analysis and are often based on referrals to Trade Regulatory Audit.

Filing drawback claims does not mean that every claimant will undergo the same type or scope of review. However, every claim should be prepared with the expectation that CBP may request the records necessary to substantiate it.

What Does CBP Review in a Duty Drawback Claim?

The specific areas reviewed depend on the drawback provision and methodology used.

A review may evaluate:

• Designated import entries and line items
• Merchandise descriptions and quantities
• Duties, taxes, and fees claimed for refund
• HTSUS classifications
• Import tracing information
• Evidence of exportation or qualifying destruction
• Direct identification methodology
• Substitution methodology
• Merchandise transfers and drawback rights
• Unused-merchandise certifications
• Possession requirements for substitution unused merchandise
• Manufacturing records and bills of material
• Applicable manufacturing drawback rulings
• Production and manufacture tracing
• Claim calculations and refund amounts

Current drawback regulations require the electronic claim to contain detailed information concerning the designated imports, drawback provision, classifications, manufacturing activity when applicable, transfers, exportation or destruction, and required certifications.

CBP may compare this information with underlying business records to determine whether the claim can be substantiated.

What Records Can CBP Request?

CBP has broad statutory authority to examine records relevant to customs compliance inquiries.

Under 19 U.S.C. § 1509, this authority extends to records such as statements, declarations, documents, and electronically generated or machine-readable data. The statute specifically includes persons who have filed drawback claims among those whose relevant records may be examined.

Depending on the drawback claim, requested records may include:

• Import entry records
• Commercial invoices
• Duty-payment information
• Export records
• Inventory records
• Merchandise-transfer records
• Purchase and sales records
• Transportation records
• HTSUS classification information
• Bills of material
• Production records
• Manufacturing drawback rulings
• Destruction documentation
• Records supporting drawback calculations

For additional detail, see What Documentation Is Required for a Duty Drawback Claim?

What Happens During a Formal CBP Regulatory Audit?

Formal regulatory audits conducted under 19 U.S.C. § 1509 have specific procedural requirements.

Before the audit begins, the CBP auditor must provide a reasonable estimate of the time expected for the audit and inform the party of its right to an entry conference. During the entry conference, the purpose of the audit can be explained and an estimated completion date established.

During the audit, CBP may examine relevant records, transaction data, compliance procedures, and other information within the defined audit scope.

After completion of on-site audit activities, CBP must schedule a closing conference to explain the preliminary results. Except in specified circumstances, such as when a formal investigation has commenced, the statute generally requires the formal written audit report to be completed within 90 days after the closing conference unless CBP provides written notice explaining the delay and anticipated completion date.

These formal audit procedures should not be assumed to apply to every drawback Desk Review or routine claim-verification request.

Can CBP Review a Claim After Accelerated Payment?

Yes.

Accelerated Payment does not mean that a drawback claim has been finally liquidated or permanently approved.

Under 19 CFR § 190.92, accelerated payment is payment of estimated drawback before liquidation of the drawback entry. The regulation expressly states that accelerated payment does not constitute liquidation.

CBP can therefore continue reviewing the claim before final liquidation.

After liquidation, CBP may pay any additional amount due or demand repayment if accelerated payment exceeded the amount ultimately determined to be allowable.

CBP may also propose revocation of a claimant's accelerated-payment approval for good cause, including noncompliance with drawback laws or regulations.

What Issues Can CBP Identify During a Drawback Review?

A review can identify issues that affect all or part of a drawback claim.

Potential issues include:

• Import or export transactions that cannot be adequately substantiated
• Differences between claim data and underlying business records
• Incorrect or inconsistent HTSUS classifications
• Unsupported merchandise transfers
• Failure to establish the claimant's right to drawback
• Insufficient inventory tracing
• Manufacturing records that do not support the claimed methodology
• Inaccurate bills of material or production data
• Unsupported substitution relationships
• Missing certifications
• Calculation errors
• Failure to establish qualifying exportation or destruction
• Failure to satisfy applicable statutory or regulatory timing requirements

Because current drawback claims include detailed import, manufacturing, transfer, export, destruction, and certification data, companies should be able to connect the information reported in the claim to their underlying records.

What Happens If CBP Finds a Problem?

The result depends on the nature and significance of the issue.

CBP may request additional records or explanations before making a determination. If the available documentation does not support part of a drawback claim, the affected amount may not ultimately be allowed.

For claims paid through Accelerated Payment, the amount received remains an estimated payment until liquidation. If CBP determines at liquidation that too much drawback was paid, CBP can demand repayment of the excess.

More significant or systemic compliance issues may result in additional CBP review or other action depending on the facts.

An identified issue does not necessarily mean that every transaction in a drawback program is invalid. The impact depends on which claims, transactions, methodologies, or records are affected.

How Can a Company Prepare for a Duty Drawback Review or Audit?

Preparation should focus on whether the company can recreate and substantiate the transactions underlying its drawback claims.

Companies should be prepared to:

• Reconcile drawback claim data to source systems
• Verify designated import entries and eligible duty amounts
• Confirm export or destruction evidence
• Validate HTSUS classifications
• Review merchandise-transfer and drawback-right records
• Confirm inventory tracing
• Review substitution methodology and supporting data
• Verify bills of material and production records for manufacturing claims
• Confirm that the appropriate manufacturing drawback ruling applies
• Recheck claim calculations
• Organize supporting records so selected transactions can be traced from importation through exportation or destruction
• Identify and investigate discrepancies before records are submitted to CBP

For claimants using Accelerated Payment, documented internal procedures and controls are particularly relevant. CBP requires accelerated-payment applicants to describe their compliance procedures, recordkeeping program, maintained records, and annual review process.

Next Steps

A CBP request concerning a drawback claim should be addressed carefully and with records that directly support the transactions under review.

If your company receives a Duty Drawback Desk Review, Request for Information, or broader CBP audit involving drawback, the first step is to identify the scope of the request, assemble the underlying records, and verify that the submitted information agrees with the claims filed.

For information about J.M. Rodgers' role in that process, see How J.M. Rodgers Supports Clients During CBP Duty Drawback Audits.

Disclaimer

This information is general in nature and does not constitute legal advice. CBP review and audit procedures depend on the scope of the review, applicable drawback provision, transactions involved, records requested, and specific circumstances of the claimant.