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Improper handling of Incoterms and landed cost accounting

Customs at a port of call Incoterms and CBP Audits

Understanding the Impact of Incoterms on Import Tax Compliance

What Are Incoterms?

Incoterms, or International Commercial Terms, are globally recognized rules published by the International Chamber of Commerce. They define the responsibilities of buyers and sellers in international transactions, specifically regarding the shipment of goods. Common terms include:

  • FOB (Free on Board)
  • CIF (Cost, Insurance, and Freight)
  • DDP (Delivered Duty Paid)

Each term clarifies who pays for shipping, insurance, customs duties, and assumes risk during transit.

Why Improper Handling of Incoterms Is a Risk

When businesses fail to understand or verify which Incoterm was used in a transaction, they open themselves to compliance risks. Common errors include:

  • Not verifying which party, buyer or seller, was responsible for freight, insurance, or duties
  • Incorrectly attributing costs that should have been covered by the vendor to the client or vice versa
  • Misreporting costs on customs entries, leading to potential underpayment or overpayment of duties

These mistakes can result in inaccurate customs declarations, inventory valuation errors, and audits by Customs and Border Protection (CBP).

Accurate Landed Cost Accounting Is Essential for Compliance

What Is “Landed Cost Accounting”?

The “Landed cost” is the total expense of getting a product from its point of origin to the final delivery destination. It includes:

  • Purchase price of the goods
  • Shipping and freight charges
  • Customs duties and tariffs
  • Insurance costs
  • Brokerage and handling fees
  • Applicable taxes

Every component must be accurately tracked and allocated to ensure correct inventory valuation and tax reporting.

Consequences of Improper Landed Cost Accounting

Improper landed cost accounting can trigger CBP scrutiny and financial inaccuracies. Key issues include:

  • Failing to allocate the full landed cost to inventory or cost of goods sold (COGS)
  • Omitting tariff or customs duty costs from accounting records
  • Duplicating charges in error, which may distort profit margins and financial statements
  • Underreporting the true cost of goods, potentially violating CBP regulations

For importers, misstatements in landed costs can result in retroactive duty assessments, penalties, and delayed shipments.

Precision Matters in International Trade

Both Incoterms and landed cost accounting are foundational to accurate reporting and compliance in international transactions. Missteps can create significant legal and financial exposure, particularly during a CBP audit.

Importers, CPAs, and in-house finance teams must review trade agreements, confirm Incoterms with vendors, and ensure every component of the landed cost is properly recorded. When in doubt, consulting a legal team that understands international trade law and CBP requirements is critical.

If your company is facing a CBP audit or wants to prepare before one begins, contact Milikowsky Tax Law to ensure your records and processes meet federal standards.