Use of Sampling Methods and Offsetting of Overpayments and Over-Declarations in CBP Audit Procedures; Sampling Under Prior Disclosure, 53964-53972 [E9-25222]

Agencies

• DEPARTMENT OF HOMELAND SECURITY
• DEPARTMENT OF THE TREASURY
• Bureau of Customs and Border Protection

[Federal Register Volume 74, Number 202 (Wednesday, October 21, 2009)]
[Proposed Rules]
[Pages 53964-53972]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-25222]


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DEPARTMENT OF HOMELAND SECURITY

Bureau of Customs and Border Protection

DEPARTMENT OF THE TREASURY

19 CFR PARTS 162 and 163

[USCBP-2009-0029]
RIN 1505-AC00


Use of Sampling Methods and Offsetting of Overpayments and Over-
Declarations in CBP Audit Procedures; Sampling Under Prior Disclosure

AGENCY: Customs and Border Protection, Department of Homeland Security; 
Department of the Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document proposes to amend the Customs and Border 
Protection (CBP) regulations to provide further guidance for the use of 
sampling methods in CBP audits and prior disclosure cases. It also 
provides guidance for the offsetting of overpayments and over-
declarations when an audit involves a calculation of lost revenue or 
monetary penalties

[[Page 53965]]

under 19 U.S.C. 1592. The proposed amendment also includes the deletion 
of a superfluous term from the audit procedures regulations.

DATES: Written comments must be received on or before December 21, 
2009.

ADDRESSES: You may submit comments, identified by docket number, by one 
of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments via docket number 
USCBP-2009-0029.
     Mail: Trade and Commercial Regulations Branch, Regulations 
and Rulings, U.S. Customs and Border Protection, 799 9th Street, NW. 
(Mint Annex), Washington, DC 20229.
    Instructions: All submissions received must include the agency name 
and docket number for this rulemaking. All comments received will be 
posted without change to https://www.regulations.gov, including any 
personal information provided. For detailed instructions on submitting 
comments and additional information on the rulemaking process, see the 
``Public Participation'' heading of the SUPPLEMENTARY INFORMATION 
section of this document.
    Docket: For access to the docket to read background documents or 
comments received, go to https://www.regulations.gov. Submitted comments 
may also be inspected during regular business days between the hours of 
9 a.m. and 4:30 p.m. at the Trade and Commercial Regulations Branch, 
Regulations and Rulings, U.S. Customs and Border Protection, 799 9th 
Street, NW., 5th Floor, Washington, DC. Arrangements to inspect 
submitted comments should be made in advance by calling Mr. Joseph 
Clark at (202) 325-0118.

FOR FURTHER INFORMATION CONTACT: For Legal Aspects: Alan Cohen, 
Penalties Branch, Regulations and Rulings, Office of International 
Trade (202) 325-0062; For Audit and Operational Aspects: Matthew 
Krimski, Regulatory Audit, Office of International Trade, (202) 863-
6004.

SUPPLEMENTARY INFORMATION: This proposed rule is organized as follows:

I. Public Participation
II. Background
III. Proposed Amendments Concerning Statistical Sampling
    A. What is Statistical Sampling?
    B. General Requirements Applicable to Statistical Sampling
    C. Benefits for CBP from Statistical Sampling
    D. Statistical Sampling Used by Audited Persons under CBP 
Supervision
    E. Private Party Reviews and Use of Sampling in Prior Disclosure 
Cases
    F. Proposed Amendments Concerning Statistical Sampling
IV. Proposed Amendments Concerning Offsetting Overpayments and Over-
Declarations Identified by CBP Auditors for Purposes of Lost Revenue 
or Monetary Penalty Calculations under 19 U.S.C. 1592
    A. The Trade Act of 2002
    B. Offsetting Prior to the Trade Act of 2002
    C. Offsetting after the Trade Act of 2002
    D. Offsetting and Statistical Sampling
    E. Proposed Amendments Concerning Offsetting
V. Amendment to Prior Disclosure Regulations
VI. Other Changes
VII. Statutory and Regulatory Reviews
    A. Regulatory Flexibility Act
    B. Executive Order 12866
    C. Paperwork Reduction Act
    D. Signing Authority

I. Public Participation

    Interested persons are invited to participate in this rulemaking by 
submitting written data, views, or arguments on all aspects of the 
proposed rule. CBP also invites comments that relate to the economic, 
environmental, or federalism effects that might result from this 
proposed rule. Comments that will provide the most assistance to CBP in 
developing these regulations will reference a specific portion of the 
proposed rule, explain the reason for any recommended change, and 
include data, information, or authority that support such recommended 
change. See ADDRESSES above for information on how to submit comments.

II. Background

    CBP is authorized to conduct audits under 19 U.S.C. 1509 (section 
1509) (sometimes referred to in this document as CBP audits or CBP 1509 
audits). The statute authorizes CBP to examine the records of 
(including conducting an audit of) parties subject to its authority for 
the following purposes: ascertaining the correctness of any entry; 
determining the liability of any person for duty, fees, and taxes due, 
or which may be due, the United States; determining liability for fines 
and penalties; or insuring compliance with the laws of the United 
States administered by CBP. Under section 1509(b), specific procedures 
are set forth for conducting a formal audit authorized under the 
statute.
    In this document, CBP proposes to amend the CBP regulations (19 CFR 
part 163) pertaining to audit procedures. These proposed amendments 
concern the use of statistical sampling methods and the offsetting of 
overpayments of duties and fees or over-declarations of quantities or 
values against underpayments or under-declarations under certain 
prescribed circumstances. The proposed change regarding sampling 
methods is designed to reflect in the regulations a practice recognized 
in both government and industry as the most practical and expeditious 
way to accurately assess the voluminous number of entry transactions 
often encountered per audit in the modern commercial importation 
environment. The proposed change regarding offsetting reflects the 
amendment made by the Trade Act of 2002 to 19 U.S.C. 1509(b) pertaining 
to CBP audit procedures. The proposed amendments also include a 
corresponding change to 19 CFR part 162 (the prior disclosure 
regulations, 19 CFR 162.74) and the removal of the term ``compliance 
assessments'' from 19 CFR part 163 as the term has become superfluous 
as a result of CBP policy changes with respect to audits.

III. Proposed Amendments Concerning Use of Statistical Sampling

A. What Is Statistical Sampling?

    Statistical sampling is a generally accepted auditing tool used in 
the private sector and by government auditors by which an audit, 
review, or examination of a voluminous universe of records is made more 
manageable through the selection of samples from that universe. These 
methods have become a dependable means of conducting audits for a 
variety of business purposes. Government agencies use statistical 
sampling methods when conducting audits authorized by applicable law.
    More specifically, statistical sampling methodology requires random 
selection of items from a defined universe of items and statistical 
evaluation of sample results. Once the audit objective, sampling 
objective, and category of sampling have been defined, and the universe 
of entries/transactions has been analyzed in accordance with generally 
accepted statistical sampling concepts, the auditors will determine the 
sample size, sample selection technique, and sample review procedure. 
The results revealed by examination of the samples can then be applied 
to the entire universe of records, permitting conclusions to be drawn 
about the universe with a high degree of confidence. The sampling plan, 
and its preparation, is fully documented. The audit is conducted 
according to the sampling plan. After the audit has been completed, the 
basic sampling parameters, as well as the conclusions

[[Page 53966]]

indicated by the sampling plan's results, are disclosed in an audit 
report.
    The use of sampling in CBP 1509 audits has produced benefits for 
both CBP and the trade community. Sampling produces greater efficiency 
in the audit process by reducing audit related costs for the auditee 
with respect to time (including less audit time at the auditee's 
premises and less time for the auditee to pull supporting documents and 
records) and allowing CBP to best use its resources to conduct the 
audit.

B. General Requirements Applicable to Use of Statistical Sampling

    CBP audits are conducted in accordance with Government 
Accountability Office (GAO) Government Auditing Standards, and GAO 
generally recognizes the validity of statistical sampling approaches 
when properly applied, as do auditors, accountants, and statisticians 
within and outside the government. Private persons conducting reviews 
and employing statistical sampling, whether an audited person 
authorized by CBP to conduct self-testing in connection with a CBP 1509 
audit or a private party performing an independent review and 
calculation of lost revenue for prior disclosure purposes (both 
discussed in this document), must employ a sampling plan and sampling 
procedures that are consistent with generally recognized sampling 
approaches. The sampling procedures must be executed in accordance with 
the sampling plan. A number of commercial statistical sampling programs 
are available for guidance on sampling.

C. Benefits for CBP from Statistical Sampling

    Auditing has become an indispensable tool in CBP's mission to 
administer and enforce the customs laws and regulations. CBP conducts 
various kinds of commercial audits of parties engaged in various 
aspects of international trade. These parties, to name a few, include 
importers of goods, manufacturers of goods imported under provisions of 
the North American Free Trade Agreement (NAFTA), and drawback 
claimants. Audits are also conducted in furtherance of investigations 
of alleged criminal and civil violations of the customs and related 
laws. Frequently, in performing these audits, CBP encounters a universe 
of transactions that is too voluminous to review, on an entry-by-entry 
basis, in a timely or cost-effective manner. Thus, to accomplish its 
mission, CBP employs statistical sampling techniques to review these 
voluminous transactions efficiently and to produce accurate results.

D. Statistical Sampling Used by Audited Persons under CBP Supervision

    In some circumstances, CBP may authorize persons being audited to 
conduct certain reviews or tests of their own entries/transactions 
within the scope of a CBP 1509 audit. CBP auditors refer to this as 
``self-testing'' and recognize it as a valuable tool to employ during 
certain audits. Self-testing within the context of a CBP 1509 audit is 
performed by the audited person under CBP supervision.
    Self-testing occurs when CBP and the person being audited agree, 
prior to or during the audit, to have the audited person conduct its 
own review of certain entries/transactions under CBP review (i.e., 
within the time period and scope of the audit, which, in some 
circumstances within the auditor's discretion, may be modified to 
accommodate the self-testing and serve CBP's purpose). If satisfied 
with the accuracy and soundness of the review, CBP may accept the 
results. This approach is generally used to determine the extent of 
certain problematic entries/transactions and to calculate lost revenue. 
The audited person authorized to conduct self-testing may employ 
statistical sampling when approved in advance by CBP auditors, subject 
to the requirements outlined further below. (Note that ``self-testing'' 
by a person being audited differs from the situation where a private 
party uses sampling in its own, independent examination of certain 
entries/transactions conducted in connection with a prior disclosure 
claim (discussed immediately below). This private party independent 
review and sampling occurs outside the context of a CBP 1509 audit.)

E. Private Party Reviews and Use of Sampling in Prior Disclosure Cases

    In some instances, a private party will submit a prior disclosure 
claim consisting of an independent review of certain entries/
transactions and a calculation of lost revenue.\1\ (Under the prior 
disclosure regulations, 19 U.S.C. 1592(c)(4), 19 U.S.C. 1593a(c)(3), 
and 19 CFR 162.74, an importer may disclose to CBP, before or without 
knowledge of the commencement of a formal investigation, all facts 
regarding its false statements or omissions that resulted in a loss of 
duties, taxes, and fees or loss of revenue to the government through 
its violation(s) of 19 U.S.C. 1592 or 1593a.) The private party may 
employ statistical sampling in this review and calculation. The private 
party's review and calculation, including the time period and scope of 
the review, the sampling plan, and the sampling plan's execution, are 
subject to CBP review and approval.\2\ A prior disclosure will only be 
approved (or considered perfected) when the sampling plan and its 
execution are approved by CBP.
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    \1\ Generally, the terms ``lost duties'' (or ``lost duty'') and 
``lost revenue'' are used interchangeably in this document, although 
CBP notes that 19 U.S.C. 1592, applicable to penalties for false 
statements made in an entry, pertains explicitly to lost duties, 
taxes, and fees, 19 U.S.C. 1593a, applicable to penalties for false 
statements made in a drawback claim, pertains explicitly to lost 
revenue, and 19 U.S.C. 1509(b)(6)(A), applicable to offsetting, 
discussed later in this document, pertains explicitly to 
overpayments of duties and fees and calculations of lost revenue or 
monetary penalties under 19 U.S.C. 1592, thereby using both terms. 
In some instances, ``lost duties'' (with or without the additional 
``taxes and fees'') may be used in reference to 19 U.S.C. 1592 and 
``lost revenue'' may be used in reference to 19 U.S.C. 1593a. CBP 
further notes that sampling may be employed in a CBP audit conducted 
for purposes of either 19 U.S.C. 1592 or 19 U.S.C. 1593, while 
offsetting under 19 U.S.C. 1509(b)(6) may be applied in a CBP audit 
only for calculating lost duties (or lost revenue, as set forth in 
the statute) under 19 U.S.C. 1592. Finally, sampling by a private 
party is not limited to use in a CBP audit context; offsetting by 
CBP or a private party, as set forth in this document, is so 
limited.
    \2\ The appropriate CBP Fines, Penalties and Forfeitures (FP&F) 
office may approve the sampling in some circumstances; in others, 
FP&F may forward the prior disclosure that employs sampling to RA 
for review and approval of the sampling.
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F. Proposed Amendments Concerning Statistical Sampling

    Statistical sampling is an important tool available to CBP auditors 
for examining customs entries/transactions (as is traditional entry-by-
entry examination of all entries/transactions). Because the CBP 
regulations do not explicitly provide for the use of statistical 
sampling in audits, CBP proposes to amend the regulations to set forth 
the circumstances and requirements for the use of sampling methods by 
CBP and, where appropriate, audited persons authorized by CBP to 
conduct self-testing in a CBP 1509 audit or private parties conducting 
an independent review for prior disclosure purposes.
    More specifically, the proposed changes provide the following:
    (1) CBP has the sole discretion concerning whether to employ 
statistical sampling in any given case, authorize a person being 
audited to perform self-testing and use statistical sampling, or accept 
the statistical sampling used by a private party conducting an 
independent review and calculation of lost revenue in a prior 
disclosure case.
    (2) During the audit, at the audit opening conference (or 
thereafter in

[[Page 53967]]

those instances where self-testing is authorized by CBP at some point 
after the conference), CBP will explain the sampling method and how the 
sampling results would be applied in determining lost revenue and 
overpayments (see the following section for discussion of offsets for 
overpayments). An audited person, including one employing self-testing, 
who accepts the sampling plan also waives its ability to challenge the 
validity and methodology of the sampling plan at a later date. Having 
accepted the sampling plan, the audited person is limited to 
challenging only alleged computational or clerical errors. Once CBP 
approves the specifics of the sampling plan, and the person being 
audited agrees to waive its ability to challenge the validity of the 
sampling plan at a later date, the audit (or self-testing) may proceed 
in accordance with that plan. CBP's authority to conduct the audit or 
to employ sampling is not dependent on the audited person's acceptance 
of the specifics of the sampling plan.
    (3) The same waiver provision applies to a situation involving a 
private party conducting an independent review and lost revenue 
calculation for purposes of prior disclosure, where CBP elects to 
conduct a CBP audit after submission of the prior disclosure claim. In 
this instance, before commencing the audit, CBP will explain the 
specifics of the audit, as above in paragraph (2), and the waiver 
provision applies.
    (4) CBP reserves the right in any case to conduct a full entry-by-
entry audit if it deems such an audit appropriate.

IV. Proposed Amendments Concerning Offsetting Overpayments and Over-
Declarations Identified by CBP Auditors for Purposes of Lost Revenue or 
Monetary Penalty Calculations Under 19 U.S.C. 1592

A. The Trade Act of 2002

    CBP is updating the regulations to reflect an amendment to section 
1509(b) (section 1509(b)) made by Section 382 of the Trade Act of 2002 
(the Act; Pub. L. 107-210, 116 Stat. 933 (2002)). Section 382 of the 
Act amended section 1509(b) by adding the following paragraph (6):

    (6)(A) If, during the course of any audit conducted under this 
subsection, the Customs Service [now CBP] identifies overpayments of 
duties or fees or over-declarations of quantities or values that are 
within the time period and scope of the audit that the Customs 
Service [CBP] has defined, then in calculating the loss of revenue 
or monetary penalties under section 592 [of the Tariff Act of 1930, 
as amended; 19 U.S.C. 1592], the Customs Service [CBP] shall 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, if such overpayments or 
over-declarations were not made by the person being audited for the 
purpose of violating any provision of law.
    (B) Nothing in this paragraph shall be construed to authorize a 
refund not otherwise authorized under section 520 [of the Tariff Act 
of 1930, as amended, 19 U.S.C. 1520].

    The explanation of the amendment to section 1509(b) made by Section 
382 of the Trade Act of 2002 (the Act; Pub. L. 107-210, 116 Stat. 933 
(2002) is contained in House Report 107-320. The House Report states:

Explanation of the provision

    This provision would require that when conducting an audit, 
Customs [now CBP] must recognize and offset overpayments and 
overdeclarations of duties, quantities and values against 
underpayments and under-declarations. As an example, if during an 
audit Customs [CBP] finds that an importer has underpaid duties 
associated with one entry of merchandise by $100 but has also 
overpaid duties from another entry of merchandise by $25, then any 
assessment by Customs [CBP] must be the difference of $75.

    CBP notes that the above explanation is qualified by the statute's 
explicit limitation on offsetting to identified overpayments/over-
declarations and under-payments/under-declarations that are within the 
time period and scope of the audit as defined by CBP.

B. Offsetting Prior to the Trade Act of 2002

    Prior to the Act's amendment of section 1509(b), the ``finality of 
liquidation'' rule (19 U.S.C. 1514) precluded offsetting (also called 
netting) when CBP issued a claim for lost duties, taxes, and fees under 
19 U.S.C. 1592(d).\3\ Thus, prior to the Act, once a liquidation had 
become final with respect to an entry that was overpaid, CBP was bound 
by the liquidation and could not offset an overpayment against the 
underpayments that formed the basis of the penalty action. (See United 
States v. Snuggles, Inc., 20 C.I.T. 1057, 937 F. Supp. 923 (C.I.T. 
1996).) In contrast, imposition of a penalty and/or a demand for lost 
duties, taxes, or fees relative to violative entries identified and 
included in a penalty case is authorized under section 1592 
notwithstanding the provisions of 19 U.S.C 1514.
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    \3\ Pursuant to the ``finality of liquidation'' rule, with 
respect to liquidation of an entry (as opposed to other CBP 
decisions), a CBP decision on liquidation is final and conclusive 
(binding) on all parties unless timely protested under 19 U.S.C. 
1514 within 180 days of the liquidation.
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C. Offsetting After the Trade Act of 2002

    The reason for the offsetting amendment to section 1509(b) made by 
Section 382 of the Trade Act of 2002 (the Act; Pub. L. 107-210, 116 
Stat. 933 (2002)) is contained in House Report 107-320. The House 
Report states:

    Reason for change
    A government audit should be an even-handed and neutral 
evaluation of a person's compliance with the law. The government 
should treat overpayments/overdeclarations and underpayments/
underdeclarations equally, and if both are found during an audit, 
they should be used to offset each other. The Committee redrafted 
this provision on the basis of concerns from Customs [now CBP]. It 
is the Committee's intention that this provision shall not affect in 
any way Customs' [CBP's] current authority to define an audit's 
scope, time period, and methodology.

CBP notes that this quoted language from the House Report clearly 
indicates that offsetting is limited to identified overpayments/over-
declarations and underpayments/under-declarations that fall within the 
time period and scope of the audit as defined by CBP.
    As a result of the Act's amendment to section 1509(b) permitting 
offsetting, CBP is now authorized under the statute to account for 
overpayments of duties and fees and over-declarations of quantities or 
values when calculating loss of duties, taxes, or fees (referred to as 
``loss of revenue'' in the statute) and monetary penalties levied under 
section 1592, if:
    (1) The overpayments or over-declarations are identified by CBP 
during an audit (review or examination) conducted by CBP under section 
1509(b);
    (2) The audit was completed on or after August 6, 2002, the 
effective date of the Act;
    (3) The overpayments or over-declarations relate to liquidated 
entries;
    (4) The overpayments or over-declarations are identified by CBP as 
having been made within the time period and scope of the audit as 
defined by CBP; and
    (5) The overpayments or over-declarations are determined by CBP not 
to have been made for the purpose of violating any provision of law, 
including the customs laws and laws enforced by other agencies, 
including but not limited to, the Internal Revenue Service.
    Regarding item (1) above (the requirement that offsetting applies 
only where the audit is conducted under section 1509(b)), where 
overpayments or over-declarations are identified through a process 
other than an audit conducted under the statute, e.g., a process 
conducted by an agent, import specialist, or inspection officer in the 
performance of his/her duties, offsets

[[Page 53968]]

will not be allowed. CBP may allow offsetting when an audited person 
conducts self-testing under the purview of a section 1509(b) audit, 
provided that other requirements are met. In this instance, the private 
party's self-testing, and any offsetting applied, occurs within the 
context of a section 1509(b) audit and is subject to the CBP auditor's 
review and approval.
    Regarding item (4) above (concerning time period and scope of the 
audit), CBP has the sole discretion to define the time period and scope 
of an audit conducted pursuant to section 1509. This includes defining 
the time period and scope of an audited person's self-testing conducted 
under CBP supervision as part of a CBP audit.
    CBP emphasizes that for offsetting purposes, where statistical 
sampling is employed in the audit (selecting a smaller number of 
entries/transactions to represent a greater universe of entries/
transactions), identification of underpayments and overpayments is 
limited to the entries/transactions actually examined (i.e., viewed) by 
CBP auditors. It is only from these examined entries/transactions that 
CBP ``identifies'' overpayments or over-declarations, as required by 
section 1509(b)(6). (See ``Offsetting and statistical sampling'' 
section further below.)
    Regarding item (5) above (concerning the restriction on offsetting 
relative to an overpayment or over-declaration made for the purpose of 
violating any law), CBP will disallow offsetting where it determines 
that an overpayment or over-declaration was made for the purpose of 
violating any law, whether or not CBP is charged with enforcing such 
law. Any specific intentionally made overpayment/over-declaration 
identified for offsetting will be disallowed. Similarly, offsetting 
will not be allowed to reduce underpayments made fraudulently. Thus, 
CBP will disallow offsetting entirely where any underpayments/under-
declarations identified for offsetting were made knowingly and 
intentionally (i.e. derived from a knowing and intentional act).
    The Regulatory Audit, Office of International Trade (RA) field 
office conducting the audit will refer all matters regarding 
disallowance to the appropriate FP&F office for determination. If a 
determination to disallow offsets is made, and a penalty notice is 
issued under section 1592(a) and (c), the determination to disallow 
offsets will be subject to review by the CBP official having the 
delegated authority to decide a petition for relief filed pursuant to 
section 1592(b) and 19 U.S.C. 1618. If a penalty notice is not issued 
but a demand for lost duties is issued pursuant to section 1592(d), the 
same determination, upon request, may be reviewed pursuant to 19 CFR 
162.79b (a means by which an importer may seek Headquarters review of a 
demand for lost duties under 19 U.S.C. 1592 (or 19 U.S.C. 1593a which 
is not relevant to offsetting)).
    CBP notes that offsetting may be permitted where the overpayments 
or over-declarations, within the time period and scope of the audit, 
were not made by the same acts, statements, or omissions that caused 
the underpayments or under-declarations; nor are such overpayments or 
over-declarations limited to having occurred on the same entry or 
entries that evidence the underpayments or under-declarations. Offsets, 
however, will not be allowed for duties paid on goods for which a duty 
allowance or preference was not timely claimed or established at the 
time of entry, or within the time allowed after entry, under applicable 
law or regulation. This payment of duties is not an overpayment within 
the meaning of the offset provision in this circumstance because it 
results from the failure to timely meet the allowance or preference 
qualification requirement. Where the offset provision is applied during 
an audit, CBP will set forth in the audit report the pertinent facts 
developed concerning the nature of the overpayments or over-
declarations in a given case.
    Finally, in accordance with section 1509(b)(6)(B), while offsetting 
is allowed in certain circumstances despite the finality of 
liquidation, where the offsetting results in a net overpayment of 
duties, CBP will not issue a refund unless, with respect to a given 
overpayment (or overpayments), a refund is otherwise authorized under 
19 U.S.C. 1520 (section 1520). Section 1520 pertains to CBP's authority 
to refund overpaid amounts in various specified circumstances and to 
reliquidate an entry when an importer makes a post-entry NAFTA claim 
within a year of importation (19 U.S.C. 1520(d)). Also, at the time the 
offsetting law was enacted, section 1520(c)(1) provided for 
reliquidation of an entry to correct a clerical error, mistake of fact, 
or other inadvertence. That provision was repealed in 2004 and now 
resides in 19 U.S.C. 1514(a). Congress intended its reference to 
refunds under section 1520 in the offsetting statute enacted in 2002 
(section 1509(b)(6)(B)) to include the provision for clerical error, 
mistake of fact, and other inadvertence. Therefore, CBP proposes to 
include reference to clerical error, mistake of fact, and other 
inadvertence under 19 U.S.C. 1514(a) in the proposed regulation as a 
possible basis for refunds along with section 1520.\4\
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    \4\ Under the former section 1520(c)(1) (repealed under Pub. L. 
108-429, Title II, Sec. 2105, Dec. 3, 2004), an importer could file 
a petition for reliquidation to correct a clerical error, mistake of 
fact, or other inadvertence up to one year from the date of 
importation. Under current section 1514(a), an importer has 180 days 
from the date of liquidation to file a protest to correct these 
errors. For this reason, it is unlikely that a CBP audit of 
liquidated entries will uncover an entry/transaction that is 
eligible for a refund under section 1514.
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    By limiting refunds to section 1520, Congress indicated that the 
offsetting provision of section 1509(b)(6) was not intended to, by 
itself, authorize a refund or alter the existing statutory scheme 
regarding the issuance of refunds. Therefore, overpayments properly 
identified in a CBP audit will be offset against properly identified 
underpayments, and refunds relative to overpayments will not be made 
under section 1509(b)(6)(B) within the audit process. Where CBP 
auditors identify an overpayment entry/transaction in a CBP audit that 
is eligible for a refund under section 1520 (an unlikely prospect but 
not inconceivable under section 1520(d) because of the one-year after 
importation filing period) or section 1514(a), as set forth above, CBP 
will advise the audited person to file a section 1520 claim or section 
1514 protest at the appropriate CBP port office and will not include 
the entry/transaction's overpayment in the audit's calculation of 
offsetting.
    Illustration: Where underpayments identified in a CBP audit amount 
to $1,200 and overpayments amount to $1,000, the audited person would 
be responsible for payment of only $200 (not $1,200) in lost revenue. 
If, during the course of the audit, a properly identified overpayment 
entry/transaction was recognized as possibly refund-eligible under 
either 19 U.S.C. 1514 or 19 U.S.C. 1520, as above, the audited person 
would be advised to file for reliquidation under the appropriate 
process relative to that overpayment. Thus, where underpayments 
identified in a CBP audit total $1,000 and identified overpayments 
approved for offsetting total $1,200 (not including any overpayments 
that are eligible for reliquidation (and refund) under sections 1514 or 
1520), the audited person would not be responsible for payment of any 
lost revenue because the overpayments exceed the underpayments, and a 
refund of the net overpayment of $200 will not be paid. The audited 
person would be advised to seek reliquidation and a refund under

[[Page 53969]]

either 19 U.S.C. 1514 or 1520 for any overpayments eligible for such 
relief.

D. Offsetting and Statistical Sampling

    In accordance with the previous discussion of sampling, where 
sampling is employed in an audit that involves offsetting, identified 
overpayments and over-declarations will be extrapolated from the 
smaller number of entries/transactions actually examined (the sample 
transactions/entries) over the larger universe of entries/transactions 
encompassed within the time period and scope of the audit in the same 
way that underpayments and under-declarations, i.e., violative entries/
transactions, will be extrapolated. (This extrapolation exercise is 
also referred to as ``projecting'' the sample results over the universe 
of entries/transactions.) However, as explained previously, where a 
sampling method is employed, CBP will not offset for, and therefore 
will not extrapolate for, a specific overpayment that is outside of the 
sample examined (i.e., the entries/transactions actually viewed by CBP 
auditors), even if the overpayment otherwise falls within the time 
period and scope of the audit and thus within the universe of entries/
transactions. To do otherwise would undermine the representative 
purpose inherent in the statistical sampling (extrapolation/projection) 
approach, just as would going outside the entries/transactions actually 
examined to identify another violative entry/transaction (underpayment/
under-declaration) for purposes of the audit.
    Illustration: CBP initially sets forth the time period and subject 
matter scope of the audit and thereby identifies the universe of 
transactions as consisting of 5,000 entries/transactions. In accordance 
with generally accepted statistical sampling concepts and techniques, 
CBP determines the entries/transactions to be examined and selects 500 
entries/transactions for examination by CBP auditors. Of the 500 
entries/transactions examined, CBP auditors identify 50 underpayment 
entries/transactions and 10 overpayment entries/transactions. These are 
the total representative underpayments and overpayments ``identified'' 
for offsetting under the statute. The relevant information obtained 
from these underpayment and overpayment entries/transactions is 
projected over the universe of 5,000 entries/transactions to 
extrapolate total underpayments of $8,000 and total overpayments of 
$2,000. The total underpayments will be offset by the total 
overpayments, resulting in total loss of duty in the amount of $6,000. 
Should the audited person point to any specific overpayments outside 
the 500 entries/transactions examined (even those within the time 
period and subject matter scope of the audit and thus within the 
universe of entries/transactions), such overpayments will be considered 
outside the sampling plan's targeted set of entries/transactions and 
will not be considered in the projection. (Of course, any entries/
transactions outside the time period and/or scope (subject matter) of 
the audit also will not be considered.)

E. Proposed Amendments Concerning Offsetting

    Because the CBP regulations do not reflect the change in the law 
made by section 382 of the Act (concerning offsets), CBP is proposing 
to amend the regulations pertaining to CBP audits to reflect the 
existing offsetting provision of section 1509(b)(6). CBP notes that the 
offsetting provision of the Act is self-effectuating and has had legal 
effect since the effective date of the Act, August 6, 2002. Thus, while 
the offsetting regulatory amendment is put forward as a part of this 
proposed regulation, the offsetting provision of 19 U.S.C. 1509(b) is 
already legally effective.

V. Amendment to Prior Disclosure Regulations

    As discussed previously, where a private party submits a prior 
disclosure claim consisting of an independent review of certain 
entries/transactions and a loss of revenue calculation, the private 
party may use statistical sampling to calculate lost revenue. The 
sampling used is subject to the requirements of proposed Sec.  
163.11(c) (see proposed regulatory text and Section III of this 
document pertaining to sampling). Since the changes proposed in this 
rule regarding sampling impact the prior disclosure process to some 
extent, a corresponding amendment is proposed to the prior disclosure 
regulations, 19 CFR 162.74, to reference the sampling provision of 
Sec.  163.11(c) and make clear that any sampling method used to 
calculate lost revenue is subject to CBP approval. If the sampling 
method is rejected as flawed, the prior disclosure claim will not be 
approved.

VI. Other Changes

    As compliance assessments are no longer the central focus of CBP's 
auditing program, the proposed amendments include a proposal to remove 
from pertinent regulations references to compliance assessments. In 
this regard, ``audit'' is the preferred term, but references to a 
``review'' or ``examination'' have the same meaning, provided that the 
action is conducted under section 1509 in furtherance of the statute's 
purposes.
    Also, as the former Office of Investigations of the U.S. Customs 
Service is now part of Immigration and Customs Enforcement (ICE), CBP 
is proposing to add a reference to ICE in the regulation (19 CFR 
163.11(f)) concerning formal investigations.

VII. Statutory and Regulatory Reviews

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
Federal agencies to examine the impact a rule would have on small 
entities. A small entity may be a small business (defined as any 
independently owned and operated business not dominant in its field 
that qualifies as a small business per the Small Business Act); a small 
not-for-profit organization; or a small governmental jurisdiction 
(locality with fewer than 50,000 people).
    The entities affected by this proposed rule are importers and 
various other parties who are subject to a CBP audit under the CBP 
regulations. ``Importers'' are not defined as a ``major industry'' by 
the Small Business Administration (SBA) and do not have a unique North 
American Industry Classification System (NAICS) code; rather, virtually 
all industries classified by SBA include entities that import goods and 
services into the United States. Thus, entities affected by this 
proposed rule would likely consist of the broad range of large, medium, 
and small businesses operating under the customs laws and other laws 
that CBP administers and enforces. These entities include, but are not 
limited to, importers, brokers, and freight forwarders, as well as 
other businesses that operate under drawback, bonded warehouse, and 
foreign trade zone procedures and those conducting various activities 
under bond.
    The proposed amendments, if adopted as final, would bring the 
regulations concerning audit procedures up to date with CBP practices 
by explicitly providing for the use of sampling methods in audits 
conducted by CBP under 19 U.S.C. 1509. The use of sampling methods is 
expected to facilitate and enhance the effectiveness of the CBP audit 
process for CBP and private entities, thus making the process less 
burdensome for both parties. Also, if adopted, the proposed amendments 
would bring the regulations up to date with existing law regarding the 
offsetting of overpayments and over-declarations for the purpose of

[[Page 53970]]

calculating loss of revenue or monetary penalties under 19 U.S.C. 1592.
    Because these amendments to the regulations affect such a wide-
ranging group of entities involved in the importation of goods to the 
United States, the number of entities subject to this proposed rule 
would be considered ``substantial.'' Additionally, these changes to the 
regulations would confer a small, positive economic benefit to affected 
entities as a result of a more efficient audit process and, in some 
cases, a reduction of duties found owing to the government. Neither of 
these benefits, however, would rise to the level of being considered a 
``significant'' economic impact. We welcome comments on this 
conclusion. If we do not receive any comments contradicting our 
findings, we may certify that this rule will not have a significant 
economic impact on a substantial number of small entities at the final 
rule stage.

B. Executive Order 12866

    The proposed rule, if adopted as a final rule, would not impose 
additional requirements or procedural burdens on persons affected and 
would not have an economic impact on them except in certain penalty 
cases in which the persons affected would realize a reduction in the 
amount of a penalty, or in the amount of lost revenue owed, due to the 
allowance of offsetting. Thus, the rule would not have an annual effect 
on the economy of $100 million or more or adversely affect in a 
material way the economy, a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or state, 
local, or tribal governments or communities. There is no identifiable 
relationship between what the rule requires, permits, or accomplishes 
and the procedures, obligations, or responsibilities of other agencies 
or the obligations of affected persons to other agencies. Thus, the 
rule would not create a serious inconsistency or otherwise interfere 
with an action taken or planned by another agency. The rule would not 
materially alter the budgetary impact of entitlements, grants, user 
fees, or loan programs, as the rule's provisions have nothing to do 
with these matters. Also, the rule would not raise novel legal policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in E.O. 12866. Thus, the proposed amendments 
of this rule do not meet the criteria of a ``significant regulatory 
action'' as described in E.O. 12866.

C. Paperwork Reduction Act

    The collections of information in part 163 of the current CBP 
regulations have already been approved by the Office of Management and 
Budget (OMB) in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507) and have been assigned OMB control number 1651-0076 
(General recordkeeping and record production requirements). This 
proposed rule does not involve a change to the existing approved 
information collection. Affected persons are already required to 
provide relevant information or records requested by CBP during an 
audit procedure conducted under the authority of 19 U.S.C. 1509 (the 
CBP audit statute) and the CBP regulations. Records or information 
having to do with overpayments or over-declarations for offset purposes 
under paragraph (b)(6) of the statute fall within this existing 
requirement. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless the 
collection of information displays a valid control number assigned by 
OMB.

D. Signing Authority

    This proposed regulation is being issued in accordance with 19 CFR 
0.1(a)(1) pertaining to the Secretary of the Treasury's authority (or 
that of his or her delegate) to approve regulations pertaining to 
certain revenue functions.

List of Subjects

19 CFR Part 162

    Administrative practice and procedure, Customs duties and 
inspection, Penalties, Reporting and recordkeeping requirements.

19 CFR Part 163

    Administrative practice and procedure, Customs audits, Customs 
duties and inspection, Imports, Penalties, Reporting and recordkeeping 
requirements.

Proposed Amendments to the Regulations

    Accordingly, parts 162 and 163 of the CBP regulations (19 CFR Parts 
162 and 163) are proposed to be amended as set forth below:

PART 162--INSPECTION, SEARCH AND SEIZURE

    1. The general authority citation for part 162 continues to read as 
follows:

    Authority:  5 U.S.C. 301; 19 U.S.C. 66, 1592, 1593a, 1624; 6 
U.S.C. 101; 8 U.S.C. 1324(b).
* * * * *
    2. Section 162.74 is amended by adding new paragraph (j) to read as 
follows:


Sec.  162.74  Prior disclosure.

* * * * *
    (j) Prior disclosure using sampling. (1) A private party may use 
statistical sampling to ``disclose the circumstances of a violation'' 
and for calculation of lost duties, taxes, and fees or lost revenue for 
purposes of prior disclosure, provided that the statistical sampling 
satisfies the three criteria in 19 CFR 163.11 (c)(2). When the private 
party submits a prior disclosure employing statistical sampling, the 
time period, scope, and any sampling plan employed by the private 
party, as well as the execution and results of the self-review, 
including the sampling plan, are subject to CBP review and approval. 
The private party submitting a prior disclosure that employs sampling 
under this paragraph may not contest the validity of the sampling plan 
or its methodology at a later date and will be limited to challenging 
computational and clerical errors.
    (2) If a private party submits a prior disclosure claim employing 
sampling, CBP may review other transactions from the same time period 
and scope that are the subject of the prior disclosure,

PART 163--RECORDKEEPING

    3. The general authority citation for part 163 continues to read as 
follows:

    Authority: 5 U.S.C. 301, 19 U.S.C. 66, 1484, 1508, 1509, 1510, 
1624.
* * * * *
    4. Section 163.0 is amended by removing from the second sentence 
the words, ``or compliance assessment''.
    5. Section 163.1 is amended as follows:
    A. By revising paragraph (c) as set forth below.
    B. By removing paragraph (e), and redesignating existing paragraphs 
(f) through (l) as paragraphs (e) through (k).


Sec.  163.1  Definitions.

* * * * *
    (c) Audit. ``Audit'' means an examination or review by CBP under 19 
U.S.C. 1509 of records required to be maintained and/or produced by 
persons listed in Sec.  163.2, or pursuant to other applicable laws or 
regulations administered by CBP, for the purpose of furthering any 
investigation or review conducted to: ascertain the correctness of any 
entry; determine the liability of any person for duties, taxes, and 
fees due, or revenue due, or which may be due the United States; 
determine liability for fines, penalties, and

[[Page 53971]]

forfeitures; ensure compliance with the laws of the United States 
administered by CBP; or determine that information submitted or 
required is accurate, complete, and in accordance with any laws and 
regulations administered by CBP. An audit does not include a quantity 
verification for a customs bonded warehouse or general purpose foreign 
trade zone. An audit may be as extensive or simple as CBP determines is 
warranted to achieve the audit's purpose under applicable laws and 
regulations. CBP may authorize a person being audited to conduct, under 
CBP supervision, self-testing of its own transactions within the time 
period and scope of the audit.
* * * * *
    6. Section 163.6 is amended by removing the words ``or compliance 
assessment'' in paragraph (c)(1), first sentence, and in paragraph 
(c)(2), first sentence.
    7. Section 163.7 is amended by removing the words ``or compliance 
assessment'' in paragraph (a), first sentence.
    8. Section 163.11 is revised to read as follows:


Sec.  163.11  Audit procedures.

    (a) Conduct of a CBP audit. In conducting an audit under 19 U.S.C. 
1509(b), the CBP auditors, except as otherwise provided in paragraph 
(f) of this section, will:
    (1) Provide notice, telephonically and in writing, to the person to 
be audited of CBP's intention to conduct an audit and a reasonable 
estimate of the time to be required for the audit;
    (2) Inform the person who is to be the subject of the audit, in 
writing and before commencement of the audit, of that person's right to 
an entrance conference, at which time the objectives and records 
requirements of the audit, and any sampling plan to be employed or 
offsetting that may apply, will be explained and the estimated 
termination date of the audit will be set;
    (3) Provide a further estimate of any additional time for the audit 
if, during the course of the audit, it becomes apparent that additional 
time will be required;
    (4) Schedule a closing conference upon completion of the audit on-
site work to explain the preliminary results of the audit;
    (5) Complete a formal written audit report within 90 calendar days 
following the closing conference referred to in paragraph (a)(4) of 
this section, unless the Executive Director, Regulatory Audit, Office 
of International Trade, CBP Headquarters, provides written notice to 
the person audited of the reason for any delay and the anticipated 
completion date; and
    (6) After application of any disclosure exemptions contained in 5 
U.S.C. 552, send a copy of the formal written audit report to the 
person audited within 30 calendar days following completion of the 
report.
    (b) Petition procedures for failure to conduct closing conference. 
Except as otherwise provided in paragraph (f) of this section, if the 
estimated or actual termination date of the audit passes without a CBP 
auditor providing a closing conference to explain the results of the 
audit, the person audited may petition in writing for a closing 
conference to the Executive Director, Regulatory Audit, Office of 
International Trade, Customs and Border Protection, Washington, DC 
20229. Upon receipt of the request, the director will provide for the 
closing conference to be held within 15 days after the date of receipt.
    (c) Use of statistical sampling in calculation of loss of duties or 
revenue. (1) General. In conducting an audit under this section, 
regardless of the finality of liquidation under 19 U.S.C. 1514, CBP 
auditors have the sole discretion to determine the time period and 
scope of the audit and will examine a sufficient number of 
transactions, as determined solely by CBP, to make a determination as 
to whether full duties, taxes, and fees have been paid or drawback was 
properly claimed. In addition to examining all transactions to identify 
loss of duties, taxes, and fees under 19 U.S.C. 1592 or loss of revenue 
under 19 U.S.C. 1593a, or to determine compliance with any other 
applicable customs laws, CBP auditors, at their sole discretion, may 
use statistical sampling methods. During the audit, CBP auditors will 
explain the sampling plan and how the results of the sampling will be 
projected over the universe of transactions for purposes of calculating 
lost duties, taxes, and fees or lost revenue and, where appropriate, 
overpayments and over-declarations eligible for offsetting under 
paragraph (d) of this section. The person being audited and CBP will 
discuss the specifics of the sampling plan before commencement of the 
audit that employs sampling. Once the sampling plan is accepted, the 
audited person waives the ability to contest the validity of the 
sampling plan or its methodology at a later date and will be limited to 
challenging computational and clerical errors. CBP's authority to 
conduct the audit or employ statistical sampling is not dependent on 
the audited person's acceptance of the specifics of the sampling plan.
    (2) When CBP uses statistical sampling. CBP auditors have the sole 
discretion to use statistical sampling techniques when:
    (i) Review of 100 percent of the transactions is impossible or 
impractical;
    (ii) The sampling plan is prepared in accordance with generally 
recognized sampling procedures; and
    (iii) The sampling procedure is executed in accordance with that 
plan.
    (3) Statistical sampling by audited persons under CBP supervision. 
Audited persons permitted in advance by CBP to conduct self-testing of 
certain transactions under CBP supervision within the time period and 
scope of a CBP audit may use statistical sampling methods, provided 
that the three criteria contained in paragraph (c)(2) of this section 
are satisfied. CBP will determine the time period and scope of the CBP-
approved and supervised self-testing and will explain any sampling plan 
to be employed in accordance with paragraph (c)(1) of this section. The 
execution and results of the self-testing and the sampling plan are 
subject to CBP approval, and the audited person is subject to the 
waiver of paragraph (c)(1) of this section.
    (d) Offset of overpayments and over-declarations in 19 U.S.C. 1592 
penalty cases. (1) General. In conducting any audit authorized under 19 
U.S.C. 1509(b) and this section for the purpose of calculating the loss 
of duties, taxes, and fees or monetary penalty under any provision of 
19 U.S.C. 1592, CBP auditors identifying overpayments of duties or fees 
or over-declarations of quantities or values that are within the time 
period and scope of the audit, as established solely by CBP, may 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, provided that the identified overpayments 
or over-declarations were not made by the person being audited for the 
purpose of violating any provision of law, including laws other than 
customs laws, or the identified underpayments or under-declarations 
were not made knowingly and intentionally.
    (2) When audited person conducts self-testing under CBP 
supervision. Offsetting may apply to self-testing conducted by an 
audited person under CBP supervision (i.e., during a CBP audit), 
provided that CBP approves the self-testing in advance and, upon review 
of the self-testing, including any offsetting applied, approves its 
execution and results.

[[Page 53972]]

    (3) Time period and scope determined by CBP; projection when 
sampling employed. In conducting an audit under paragraph (d)(1) of 
this section or authorizing an audited person's self-testing as 
described in paragraph (d)(2) of this section, CBP will have the sole 
authority to determine the time period and scope of the audit. An audit 
employing statistical sampling will be limited to the transactions that 
the CBP auditors actually examine (i.e., review) during the audit. The 
results of the sample examination, with respect to properly identified 
overpayments and over-declarations and properly identified 
underpayments and under-declarations, will be projected over the 
universe of transactions to determine the total overpayments and over-
declarations that are eligible for offsetting and to determine the 
total loss of duties, taxes, and fees.
    (4) Same acts, statements, omissions, or entries not required. 
Offsetting may be permitted where the overpayments or over-declarations 
were not made by the same acts, statements, or omissions that caused 
the underpayments or under-declarations, and is not limited to the same 
entries that evidence the underpayments or under-declarations, provided 
that they are within the time period and scope of the audit as 
established by CBP and as described in paragraph (d)(4) of this 
section.
    (5) Limitations. Offsetting will not be allowed with respect to 
specific overpayments or over-declarations made for the purpose of 
violating any provision of law, including laws other than customs laws. 
Offsetting will not be allowed with respect to overpayments or over-
declarations resulting from a failure to timely claim or establish a 
duty allowance or preference. Offsetting will be disallowed entirely 
where CBP determines that any underpayments or under-declarations 
identified for offsetting purposes were made knowingly and 
intentionally.
    (6) Audit report. Where overpayments or over-declarations have been 
identified in accordance with paragraph (d)(1) of this section, the 
audit report will state whether they have been made within the time 
period and scope of the audit.
    (7) Disallowance determinations referred to FP&F. Any determination 
that offsets will be disallowed where overpayments/over-declarations 
were made for the purpose of violating any law, or where underpayments 
or under-declarations were made knowingly and intentionally, will be 
made by the appropriate Fines, Penalties, and Forfeitures (FP&F) office 
to which the issue was referred. CBP will notify the audited person of 
a determination whether to allow offsetting in whole or in part. The 
FP&F office will issue a notice of penalty and/or demand for lost 
duties, taxes, and fees where it determines that such action is 
warranted. Where the FP&F office issues a notice of penalty and/or 
demand, the audited person may file a petition under 19 CFR part 171.
    (8) Refunds limited. A net overpayment of duties, taxes, and fees 
will not be paid as a refund unless the circumstances of the 
overpayments meet the requirements of 19 U.S.C. 1520 or the 
requirements of 19 U.S.C. 1514(a) pertaining to clerical error, mistake 
of fact, or other inadvertence in any entry, liquidation, or 
reliquidation. In that event, the audited person must file a claim 
under the applicable statute and regulations at the appropriate CBP 
port office. Any such overpayment(s) will not be included in the 
audit's offsetting calculation.
    (e) Sampling not evidence of reasonable care. The fact that entries 
were previously within the time period and scope of an audit conducted 
by CBP in which sampling was employed, in any circumstances described 
in this section, is not evidence of reasonable care by a violator in 
any subsequent action involving such entries.
    (f) Exception to procedures. Paragraphs (a)(5), (a)(6), (b), 
(d)(7), and (d)(8) of this section do not apply once CBP and/or ICE 
commences an investigation with respect to the issue(s) involved.

Jayson P. Ahern,
Acting Commissioner, Customs and Border Protection.
    Approved: October 15, 2009.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. E9-25222 Filed 10-20-09; 8:45 am]
BILLING CODE 9111-14-P