Prior Disclosure, Penalty and Time-Barred Entries
Halvard Metals completes a self-audit and finds that, for 38 entries filed between January 2023 and February 2025, it declared copper fittings under a duty-free subheading instead of a subheading attracting 6% duty. The shortfall is $212,000. On 20 February 2026 customs issues a general notice that it will audit Halvard's 2025 entries; the notice does not mention classification. On 3 March 2026 Halvard files a written disclosure covering all 38 entries and tenders $212,000. The customs law provides that a disclosure made before customs initiates an audit or investigation, and before customs has discovered the matter, eliminates penalty; a disclosure made after initiation but before discovery reduces a penalty by 50%. The ordinary limitation for recovery of duty is three years from the date of entry. Gross negligence carries a penalty of twice the shortfall; ordinary negligence carries 50%. Nine of the 38 entries are more than three years old. Halvard had no written classification procedure and relied on its broker.
1. Is Halvard's disclosure a 'prior disclosure'? What penalty outcome should Halvard expect?
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Probably not a prior disclosure. The statute requires disclosure before customs initiates an audit or investigation. The 20 February notice initiates a general audit of Halvard, even though it does not mention classification; the later disclosure falls after that step. It does, however, come before customs discovered the misclassification, so the 50% reduction applies. If the notice is read narrowly as covering only 2025 entries, the older entries might still be prior, but the 2025 entries are after initiation. The penalty base depends on culpability. The facts point to ordinary negligence rather than gross negligence: no written procedure and reliance on a broker are failures of reasonable care, but there is no evidence of deliberate disregard. Negligence penalty = 50% × $212,000 = $106,000; reduced by 50% = $53,000. If customs characterizes the conduct as gross negligence, the penalty would be 2 × $212,000 = $424,000, reduced to $212,000. Duty and interest remain payable.
2. Can customs collect duty on the nine entries older than three years? Does the answer depend on an allegation of fraud?
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Absent fraud, no. The stated ordinary limitation is three years from the date of entry, and those nine entries fall outside it. The voluntary disclosure does not revive a time-barred duty claim; it affects penalty and demonstrates good faith, but it cannot extend the limitation. The answer would change if customs alleges fraud or deliberate concealment to which a longer or unlimited period applies. On the facts there is no evidence of fraud: the errors were repeated, but they were disclosed after a self-audit and the company cooperated. Customs may still examine the nine entries as evidence of a pattern relevant to culpability on the timely entries, but it cannot use them to extract duty. Halvard should ask customs to confirm in writing which entries are within the limitation period.
3. What should Halvard do before and during the audit to protect its position?
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First, correct the classification going forward and consider a binding tariff ruling to lock in the correct subheading. Second, quantify duty and interest by entry, separating time-barred entries, and reconcile the $212,000 figure to the ledger. Third, prepare a written reasonable-care file: classification SOP, broker instructions, training records, sample checks and evidence that the broker's advice was reviewed. Fourth, avoid uncorroborated statements to auditors; designate one contact and answer in writing. Fifth, consider whether other product lines have the same error and whether a broader disclosure is needed. Finally, negotiate the penalty on the ordinary-negligence basis, supported by the self-audit and prompt tender, and ask for a written settlement that identifies the entries and period covered.