What Every Multinational Company Should Know About … Customs Enforcement and False Claims Act Risks (Part II)
As detailed in Part I of our three-part series on Minimizing Customs Enforcement and False Claims Act Risks, the combination of the new high-tariff environment, the heightened ability of Customs (and the general public) to data mine, and the Department of Justice’s (DOJ) stated focus on using the False Claims Act (FCA) substantially increases import-related risks. In light of this heightened risk, Part II and the forthcoming Part III of this series focus on preparing for specific areas where we see heightened enforcement risk, both for Customs and FCA penalties, with this article addressing the most common FCA risks arising from submitting false Form 7501 entry summary information.
Risks Arising from Misclassifications
By far, the most common Customs errors we see relate to misclassifications on Form 7501 entry summaries. If made knowingly, these misclassifications can lead to FCA liability, as demonstrated by a high incidence of DOJ settlements based on alleged known classification errors. Relevant FCA examples include $22.2 million and $2.3 million settlements, each premised on importers knowingly misclassifying entries into lower-tariff classifications to avoid paying duties owed on the companies’ imports.
Additionally, aggressively classifying goods to avoid being subject to the China Section 301 tariffs can create the risk of FCA liability. Such opportunistic classification led to a $22.8 million settlement by an importer that used inaccurate classifications despite receiving repeated CBP notices informing the importer that the classifications it had been using for similar goods were erroneous. The importer continued using the incorrect classifications for over three years, even after an outside consultant confirmed the importer had been using incorrect classifications.
Customs Compliance Response
Maintain a Regularly Updated Classification Index. Well-supported and consistent classifications are the key to avoiding these types of errors. The most important tool for ensuring accuracy in classifications is a robust and regularly updated Customs Classification Index, which should list the HTS classification for regularly imported SKUs while incorporating support for classification decisions made, including an application of the Customs General Rules of Interpretation, advisory opinions, responses to protests against liquidation, and other relevant support.
Conduct Classification Reviews. We often find that importers leave classification decisions up to customs brokers, assuming they are experts and responsible for identifying the correct codes. Customs, however, places full responsibility for the accurate submission of all Form 7501 information on the importer of record, not the broker. Periodically review your classifications, especially for frequently imported items, to ensure accuracy.
Evaluate Classification Accuracy in Post-Entry Reviews. Customs allows importers 310 days after entry to fix any classification errors. Conduct post-entry checks to confirm the accuracy of all submitted information, and use post-summary corrections to correct any errors, including misclassifications, before liquidation. This will help catch errors and, where corrected, undermine FCA scienter.
Review Tariff Engineering. With tariff rates rising, Customs is aggressively looking for importers who have engaged in opportunistic classification to try to lower import charges. This includes a special focus on importers who have changed their classifications after the imposition of new tariffs. This does not mean importers should view themselves as locked into adverse and incorrect classifications. They should, however, adequately document any classification changes and be prepared to respond promptly to Customs inquiries.
Risks Arising from Misrepresenting the Physical Characteristics of Imported Goods
Making known misrepresentations to incorrectly claim a lower tariff classification can lead to FCA liability. For instance, an importer of brake parts settled an FCA case alleging it knowingly misrepresented the physical characteristics of its entries (claiming they were duty-free unmounted brake pads rather than mounted brake pads subject to a 2.5% classification) for $8 million.
Customs Compliance Response
Confirm Accuracy of Factual Support for Classifications. In most cases, classification is determined by (1) the physical attributes of the product and, in certain cases, (2) the primary use of the product. Ensure you have accurate backup and consistent classification for each of these issues.
Document and Retain Classification Decisions. Ensure you maintain detailed records for all classification determinations, and keep them for at least five years from the time of entry.
Risks Arising from Improper Country of Origin Declarations
Because of the imposition of special Section 301 tariffs on China, the number of importers caught making errors relating to declaring the wrong country of origin (COO) has sharply risen. The imposition of reciprocal tariffs only magnifies the importance of the COO. Generally these cases involve imported goods that were assembled in third countries using parts and components from a high-tariff country. In these situations, careful analysis is required to ensure there is sufficient manufacture, value added, and change in the name, character, and use of the product so the result is a “substantially transformed” product that is a new and different article of commerce.
FCA cases illustrate the twin risks that can arise from incorrect COO declarations. In 2021, the DOJ settled an FCA matter for $160,933, alleging the importer knowingly failed to designate that certain imports were manufactured in China, thus evading Section 301 duties.
Customs Compliance Response
Confirm Accuracy of Substantial Transformation Analysis. One of the highest-priority areas of Customs scrutiny is to find instances of importers evading customs duties either by transshipping through lower-tariff third countries or by shipping parts and components to a third country and then engaging in only minor assembly operations (e.g., from China to another Southeast Asia country). If the goods are not substantially transformed into a new and different article of commerce, then they cannot claim the lower-tariff COO. Review all instances where parts and components from a high-tariff country, like China, are used in further manufacturing in a lower-tariff country. Ensure there is a reasonable basis for the COO declaration, and document the analysis in case of Customs inquiry.
Risks Arising from Undervaluation
Failing to declare the full value of entries is another common error. Most importers use transaction value, which requires the importer to start with the price actually paid or payable, add certain mandatory additions (e.g., the value of assists and royalties), and accurately reflect any allowed voluntary deductions. Recent examples include $217,000, $729,000, and $1.3 million settlements of allegations relating to known under-declared entry values resulting in underpaid tariffs, as well as a $3.6 million settlement of civil claims resulting from the DOJ joining an FCA whistleblower lawsuit. An additional sobering example is a settlement of claims against an importer that knowingly undervalued its goods through the remedy of losing all import privileges.
More specifically, the known failure to include assists (i.e., customer-provided production aids such as tools, dies, and molds) within the entered value can incur FCA liability. Where a U.S. company provides such assists, it needs either to declare the full value of the assist on the first entry or set up a system to attribute the full value of the assist over the useful lifetime of the product, thus declaring it piecemeal over time. These values do not show up on commercial invoices, making it easy to forget to include this mandatory addition to entered value. But the risks of knowingly failing to do so are demonstrated by two FCA settlements of $4.3 million and $7.6 million for the alleged failure to include assists in the entered value.
Customs Compliance Response
Understand How to Calculate Entered Value. Most companies use transaction value to determine the entered value. Valuation is complicated in situations involving post-entry price adjustments, cash or quantity discounts, indirect payments, exchange rate conversions, and other tricky areas. Ensure valuation is calculated correctly for all entries, including for the inclusion of off-invoice mandatory additions to value.
Establish a System for Identifying and Tracking Assists, and Consistently Follow It. Importers should have a system for systematically identifying and tracking assists, which can be as simple as a spreadsheet. If this historically has not been done, a review of a company’s trial balance ledger can potentially identify historically provided assists. All assists either should be recognized on the first entry of the applicable universe of goods or apportioned over the expected useful lifetime of the assist. If the latter method is used, establish a system for tracking all relevant entries benefiting from assists and consistently add them when calculating the entered value. Share such information with your customs broker to implement a secondary check.
Risks Arising from Improper Claims of Preferential Treatment Under Free Trade Agreements
Another common error we see is failing to meet free trade agreement (FTA) requirements, such as failing to work through the COO requirements. Along these lines, in one FCA action an importer paid $22.2 million to settle allegations that, among other things, it knowingly claimed improper preferential treatment under FTAs.
Customs Compliance Response
Always Have Certificates of Origin On Hand at Time of Entry. One of the most common errors we see in customs audits and disclosures is one of the simplest to fix: Ensure that you always have the USMCA certificate of origin available at the time of importation. Under the USMCA, it is not possible to create these after the time of entry.
Apply Correct Country of Origin Principles. FTAs include different COO principles. These generally are based on a tariff-shift analysis, which is viewed as providing more certain outcomes than the more subjective substantial transformation test commonly applied by Customs. Certain products, such as automotive products under the USMCA, also have special rules for determining preferential status. Note as well that it may be necessary to apply FTA principles to determine the COO for purposes of paying normal Chapter 1-97 duties while applying substantial transformation principles for determining the country of origin for special tariffs, such as section 232 or 301 tariffs imposed by President Trump.
Risks Arising from Failure to Pay Antidumping and Countervailing Duty Orders (AD/CVD Orders)
In addition to the normal Chapter 1-97 tariffs, the U.S. government imposes a parallel set of duties under more than 600 AD/CVD orders. Because AD/CVD tariffs often are very high, failure to properly declare and pay all AD/CV duties can quickly run up tariff underpayments.
As a result, one of the most common Customs FCA claims is for failing to pay AD/CV duties. An importer of home furnishings agreed to pay $500,000 to resolve allegations that it violated the FCA by knowingly making false statements on customs declarations to avoid paying AD duties on imports from China, with four other importers agreeing to pay $275,000, $5.2 million, $10.5 million, and $15 million based on alleged known classification failures based on the same order. Three other importers paid settlements of $2.300,000, $650,000, and $100,000 to settle allegations that they had knowingly evaded AD duties under the aluminum extrusions AD duty order, while another paid $45 million to resolve allegations that it knowingly misrepresented the COO to evade AD/CV duties.
Customs Compliance Response
Use HTS Screening. The scope of an AD/CV duty is determined by its written scope, not whether it falls within any given HTS subheading. Nevertheless, every order provides HTS subheadings for the convenience of importers. Screen all entries against these HTS subheadings as an initial check, and follow up on any potential matches.
Be Wary of Counter-Intuitive Coverage of AD Duty Orders. Be aware that certain AD/CVD orders, such as the aluminum extrusions order against China, are not susceptible to HTS screening and require individual examination. Also, consider that certain AD duty orders, such as the one on solar panels, have tricky rules for determining the product scope. Learn which orders are of particular relevance for your import profile and carefully screen all potential matches against them.
Risks Arising from Misapplying Customs Duty-Free Exemptions
A number of Customs programs can result in duty-free entries, such as U.S. goods returned and the Generalized System of Preferences. Illustrating the risks inherent in misapplying duty-free exemptions, importers paid $610,000 and $908,100 to settle allegations that involved “improperly evad[ing] customs duties … breaking up single shipments worth more than those amounts into multiple shipments of lesser value in order to avoid the applicable duties.”
Customs Compliance Response
Carefully Confirm Eligibility Under All Tariff-Saving Programs. Each tariff-saving program has its own rules, which can include special eligibility requirements. Carefully review these rules and document their applicability before claiming preferential treatment.
Risks Arising from Failure to Appropriately Value Goods from Related Parties
Another common problem is that importers either do not have a transfer pricing study in place to support the arms-length nature of their pricing when purchasing from affiliates, or they improperly rely on an IRS transfer pricing study (which is impermissible because CBP has specific standards for transfer pricing studies that differ from the IRS standards). Although we are not aware of any FCA case alleging improper pricing from related parties, this conduct is common and can potentially impact a large volume of entries, making a known misdeclaration a risk factor for potential FCA liability.
Customs Compliance Response
Confirm the Existence of a Customs-Specific Transfer Pricing Study. If you do not have a customs-specific transfer pricing study in place, consider conducting or hiring a customs accounting specialist to prepare a bridge memorandum to analyze the underlying data. If you do not have an IRS transfer pricing study, then obtain one (and also take care of your IRS transfer pricing requirements).
Confirm the Consistent and Accurate Application of the Results. It is important not only to have a customs transfer pricing study but also to consistently apply its results. Ensure the entered value from every import from a related party is confirmed against the conclusions of the study.
In sum, DOJ has a rich history of using a wide variety of issues to support FCA claims, especially relating to the known false submission of Form 7501 entry summary information. By considering the compliance responses outlined above, importers can ensure that their entry summary information is accurate in the first place, to best avoid known false submissions. Part III of this series will turn its focus to FCA risks arising from improper management of import operations.
The Employee Retention Credit: IRS’s “Risking” Model Faces Legal Challenge
Case: ERC Today LLC et al. v. John McInelly et al., No. 2:24-cv-03178 (D. Ariz.)
In an April 2025 order, the US District Court for the District of Arizona denied a motion for a preliminary injunction filed by two tax preparation firms. The firms sought to halt the Internal Revenue Service’s (IRS) use of an automated “risk assessment model” that the IRS used to evaluate and disallow claims for the Employee Retention Credit (ERC), seeking to restore individualized review of ERC claims.
BACKGROUND ON THE ERC
The ERC was enacted in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to businesses affected by COVID-19 by incentivizing employers to retain employees and rehire displaced workers. The ERC allowed employers that experienced significant disruptions due to government orders or a substantial decline in gross receipts to claim a tax credit equal to a percentage of qualified wages paid to employees. Millions of employers have filed amended employment tax returns (Form 941-X) claiming the credit for periods in 2020 and 2021. Since the enactment of the CARES Act, the IRS has issued roughly $250 billion in ERC.
THE IRS’S MORATORIUM AND AUTOMATED RISK ASSESSMENT MODEL
In September 2023, the IRS instituted a moratorium on processing ERC claims to review its procedures, reduce the backlog of claims, and identify potential fraud. Before the moratorium, all ERC claims received individualized review. During the moratorium, the IRS developed an automated “risk assessment model” to facilitate the processing of claims. This model, which is alternatively known as “risking,” utilizes taxpayer-submitted data and publicly available information to predict the likelihood that a taxpayer’s claim is valid or invalid. Claims deemed to be “high risk” by the system are excluded from review by an IRS employee and instead are designated for immediate disallowance. In August 2024, the IRS lifted its ERC processing moratorium and began issuing thousands of disallowance notices to taxpayers. Notwithstanding these actions, the number of pending ERC claims remained above one million as of November 2024.
THE COURT CHALLENGE TO THE IRS’S “RISKING” MODEL
In their motion for a preliminary injunction, filed January 7, 2025, the plaintiffs (the tax preparation firms) sought a court order compelling the IRS to, among other things, stop the use of “risking” and restore individualized employee review of ERC claims. The plaintiffs claimed to be injured by the “risking” model because they were unable to collect contingency fees from clients when claims were disallowed.
In support of their motion, the plaintiffs pointed to having received on behalf of their clients many boilerplate rejections immediately following the end of the moratorium. The plaintiffs alleged that these summary disallowances were arbitrary and capricious, thus violating the Administrative Procedure Act (APA), because the “risking” model precluded the IRS from acquiring information necessary to properly evaluate the claims.[1] The plaintiffs also contended that the disallowances reflected a shift in IRS policy to disfavor ERC, with the result being that several legitimate claims were being unfairly disallowed. The plaintiffs argued that this apparent shift violated Congress’s intent in enacting legislation providing for ERC.
On April 7, 2025, the court denied the motion, finding that the plaintiffs failed to meet the high bar for injunctive relief at this stage of the litigation.[2] The court said that the record of the case at this juncture did not support the plaintiffs’ contention that the increase in claim disallowances after August 2024 was because of the IRS denying valid claims. However, the court pointed to a concession by the IRS that its use of the “risking” model may be resulting in the disallowance of legitimate claims. The court suggested at several points in its order that the plaintiffs (or the employers they support) could bring forth evidence demonstrating that the “risking” model was unduly denying benefits to deserving taxpayers.
Practice Point: This case highlights that the IRS has been adopting novel mechanisms to address its backlog of pending ERC claims, which given current resource constraints, it may seek to employ them in other contexts, including those involving income tax refunds. The “risking” model in particular, while purporting to expedite the review of certain supposedly “high-risk” claims, may be having the collateral consequence of denying benefits to eligible employers. Taxpayers with potentially meritorious claims can (and should) be prepared to administratively appeal or even litigate disallowed claims, which they can do by filing a complaint in the US district court with jurisdiction or in the US Court of Federal Claims.
[1] The plaintiffs also alleged that the IRS exceeded its statutory authority by disallowing their clients’ ERC claims without providing them a right to be heard or a direct right to appeal in an independent forum. The plaintiffs argued that the IRS violated the Due Process Clause of the US Constitution’s Fifth Amendment by depriving their clients of ERC without adequate review of these clients’ claims.
[2] More specifically, the court found that the plaintiffs did not establish that they had standing to seek the requested relief, or that the United States (through the actions of the IRS) had waived sovereign immunity as to the plaintiffs’ APA claims. The court also concluded that the plaintiffs did not show that their due process claim was likely to succeed on the merits such that a preliminary injunction was an appropriate remedy.
Recalibrating Regulation: EPA, Energy, and the Unfolding Consequences of Deregulatory Momentum
The U.S. Environmental Protection Agency (EPA) has long navigated the complex intersection of science, law, policy, and public trust. Under the Trump Administration, EPA faces renewed scrutiny. The Administration seeks regulatory rollbacks and is pursuing a broader deregulatory strategy that many believe risks sacrificing hard won environmental protections in the name of economic growth.
While early promises to reduce bureaucratic red tape struck a chord with a number in industry, implementation has appeared blunt thus far, rather than measured. Deregulatory actions have sometimes resembled sweeping cuts “with a machete instead of a scalpel,” affecting the intended target of outdated or burdensome rules, but taking with it collateral damage including critical administrative safeguards and scientific functions. Although EPA has avoided some of the steepest cuts levied on other federal agencies, many worry that this trajectory will fundamentally impair the Agency’s mission.
EPA Administrator Lee Zeldin has attempted to ease concerns, stating that he can “absolutely” assure the public that deregulation will not harm the environment. “We have to both protect the environment and grow the economy,” he stated when questioned by CBS News’s “Face the Nation” about whether he could ensure that deregulation would not have an adverse impact. Still, the juxtaposition of that reassurance against ongoing efforts to slash regulations leaves many stakeholders uneasy.
At the heart of the Administration’s argument is a broader political philosophy — an intent to upend what it views as “entrenched bureaucracy.” White House spokesman Harrison Fields emphasized in a Statement that the Administration is “prioritizing efficiency; eliminating waste, fraud, and abuse; and fulfilling every campaign promise.” Critics, however, view these efforts as retributive, undermining institutional expertise, and marginalizing science-driven decision-making. Some demand a clearer upside — what fraud, waste, and abuse has been uncovered and eliminated?
One of the most visible fronts in this deregulatory push is energy policy. A recent Executive Order directs the federal government to expedite coal leasing on public lands, and aims to designate coal as a “critical mineral.” This pivot is being positioned as part of a strategy to meet the rising energy demands of generative artificial intelligence (AI) and data centers that are expected to increase significantly electricity consumption in the coming decade.
Despite this coal-forward rhetoric, more coal-fired power capacity was retired during Trump’s first term than under either of President Obama’s terms. Analysts note that even with reduced climate regulations, coal’s economic competitiveness remains constrained by market forces and state-level clean energy mandates. “You can run all these coal plants without environmental regulations…I’m sure that will save industry money,” energy data analyst Seth Feaster of the Institute for Energy Economics and Financial Analysis recently told Wired. “Whether or not the communities around those places really want that is another issue.”
Meanwhile, the federal freeze on electric vehicle (EV) charging infrastructure funding has disrupted planned rollouts in several states. “It puts some players in a bad spot where they’ve already invested,” states Jeremy Michalek, an engineering and public policy professor at Carnegie Mellon University, in a recent article on the topic. Similar concerns are emerging in the aviation and alternative fuels sectors, where projects relying on incentives from the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA) now face sudden funding uncertainty.
Last week, Judge Mary McElroy of the U.S. District Court for Rhode Island, ordered the Trump Administration to reinstate previously awarded funds under both the IRA and the IIJA, underscoring the legal and financial turbulence surrounding the current regulatory landscape. This new normal is unwelcome to most shareholders. In a March 2025 press release about another lawsuit specifically challenging the Administration’s freeze on funding from the IRA and IIJA, Skye Perryman, President and CEO of Democracy Forward, states that “The decision to freeze funds that Congress appropriated is yet another attempt to roll back progress and undermine communities. These actions are not only unlawful, but are already having an impact on local economies.”
Meanwhile, in a recent post on TruthSocial, President Trump invited companies to relocate operations to the United States, promising “ZERO TARIFFS, and almost immediate Electrical/Energy hook ups and approvals. No Environmental Delays.” But for regulated entities, states, and federal partners navigating a rapidly shifting policy environment overseen by a new Administration that has diminished and fractured its workforce and shown a propensity to backpedal from bold claims, the promise of speed may not be worth the cost of lost clarity, stability, and long-term sustainability.
GeTtin’ SALTy Episode 51 | Overview of Washington’s 2025 Legislative Session: Tax Policy Challenges and Business Impacts [Podcast]
In this episode of GeTtin’ SALTy, host Nikki Dobay is joined by Max Martin, Director of Tax and Fiscal Policy at the Association of Washington Business, to discuss Washington’s legislative session and its implications for state tax policy.
With COVID relief funds dwindling and a projected budget shortfall of up to $20 billion, policymakers are exploring a range of revenue-raising measures, from B&O tax increases and a new surcharge on large business to the creation of a statewide payroll tax and even a potential wealth tax.
Max provides insights into these proposals, Governor Ferguson’s stance, and the challenges businesses face in navigating Washington’s evolving tax landscape.
As the session nears its end, Nikki and Max explore the balance between maintaining competitiveness and funding critical state programs.
Lastly, they share their favorite things about spring in the Pacific Northwest.
Advancing the IRS Whistleblower Program
The director of the IRS Whistleblower Office (the Office) released the Office’s first multi-year operating plan outlining its guiding principles, strategic priorities, achievements, and efforts to advance the program. As part of its plan, the Office’s mission and vision statements were enhanced. The mission states it is to effectively administer the Whistleblower Program by ensuring:
the IRS compliance functions receive and consider specific, timely and credible claims that identify non-compliance with the tax and other laws administered by the IRS;
whistleblowers receive required notifications timely; and
awards are fairly determined and paid
The IRS Whistleblower Office states its vision is “to effectively promote voluntary compliance and reduce the tax gap by providing excellent service to whistleblowers, taxpayers and other stakeholders.”
With the intention of making the Whistleblower Program a success, the plan is framed around six strategic priorities:
1.
Enhance the claim submission process to promote greater efficiency.
2.
Use high-value whistleblower information effectively.
3.
Award whistleblowers fairly and as soon as possible.
4.
Keep whistleblowers informed of the status of their claims and the basis for IRS decisions on claims.
5.
Safeguard whistleblower and taxpayer information.
6.
Ensure the workforce is supported with effective tools, technology, training, and other resources.
Each of these strategic proprieties sets forth its priority efforts for 2025 and, separately, for 2026-2027.
Apart from increasing processing efficiencies, expanding the use of data analytics, adjusting staffing and other procedural efforts to enhance the program, the plan proposes significant improvements for whistleblower claimants. It updated and improved Form 211 (Application for Award for Original Information), including an updated list of alleged violations to select from, and includes a new option for multiple whistleblowers to file jointly. It is developing a digital portal to make claim submission easier. It also is developing a new approach for the initial analysis of claims to ensure high-value submissions are identified and prioritized to improve and speed up the evaluation of claims for awards.
The Plan and its implementation will make it easier and faster to obtain a reward while still preserving confidentiality and protection of whistleblower records and taxpayer information. It also provides for improved communication with whistleblowers during the pendency of their claims.
The Lobby Shop: Reconciliation Reckoning [Podcast]
The Lobby Shop team turns their focus on the ongoing budget reconciliation process in Congress that will shape the Trump administration’s economic agenda. Hosts Josh Zive, Paul Nathanson and Liam Donovan provide a quick update on the latest tariff developments before diving into the reconciliation process and the shifting legislative dynamics between the House and the Senate. Then, Liam does a deep dive on how economic pressures are reshaping political strategy, and what it all means for government funding timelines and the looming debt ceiling. Tune in for a Liam-style breakdown of the often confusing reconciliation process in the next couple of weeks.
What Every Multinational Company Should Know About … Tips and Tricks for Sell-Side Contracts
Assessing Tariff Impacts in Commercial Contracts
With the size and scope of President Trump’s tariffs continuing to shift, this is a critical time for businesses to assess their contracts and determine how increased tariff costs might adversely affect profitability, and whether there are any strategies to mitigate the losses.
Contract Review for Tariff Provisions
Tariffs typically affect profitability in two primary ways:
Increased costs of material or component inputs due to the tariffs, and
Tariffs applied to the final sale price of imported or exported goods.
As indicated below, force majeure and commercial impracticability provisions are blunt instruments, meaning the allocation of tariff-related costs is best addressed in the pricing provisions of commercial contracts. When drafting these provisions, consider the following:
Price Adjustments: Inclusion of a mechanism allowing for equitable price increases in response to rising costs associated with taxes, duties, tariffs, or other expenses resulting from changes in law, regulations, or other agreed-upon reasons can be beneficial to the seller. These types of pricing provisions can mitigate financial strain from tariff hikes.
Tariff Allocation: Tariffs are always paid directly to U.S. Customs by the importer of record, which must be a single party. But Customs does not care if parties reallocate tariff responsibility behind the scenes. Pricing provisions thus can specify how tariff costs are allocated between parties for foreign goods imported into the United States and for goods exported to foreign countries. This allocation can be drafted via express provisions on the topic or through careful use of Incoterms to set forth delivery responsibility. Clarity regarding (a) which party is responsible for paying any tariffs to the applicable government agency; (b) whether the seller, the buyer, or both share responsibility for tariff payments; and (c) what the reimbursement mechanism will be, if any, is essential for cost planning and risk mitigation.
In cases where pricing provisions do not provide adequate protection against tariff-related costs, other contractual clauses should be reviewed. For example:
Termination Rights: Termination provisions may offer an exit strategy if continued performance becomes economically unsustainable. Particular attention should be given to whether termination for convenience is permitted and, if so, what notice requirements apply.
Purchase Order Acceptance/Rejection: Contracts may provide flexibility regarding the acceptance or rejection of purchase orders. In the absence of a fixed quantity commitment or a requirements/output agreement, a seller may be able to reject orders and thereby decline to supply products.
Common Misconceptions Regarding Tariff Relief
Force Majeure/Commercial Impracticability: A frequent misconception is that a force majeure clause or the doctrine of commercial impracticability may apply to excuse performance due to increased tariff costs. While these doctrines are sometimes used strategically to initiate discussions around contract renegotiation, courts often view cost increases as foreseeable business risks that cannot support invoking force majeure or commercial impracticability defenses (unless the cost increase, such as a heightened tariff, is expressly identified as a force majeure event that excuses performance).
Tax Allocation Provision: Another common misconception is that a tax provision, providing the buyer pays all taxes, will permit a U.S. seller to pass along the tariffs on its inputs to a U.S. buyer. Typically, tax provisions are drafted to allocate responsibility for taxes levied on the transaction between the buyer and seller and do not contemplate taxes/tariffs levied on the upstream inputs.
Recommended Next Steps
This is an area of law where sophisticated counsel can help identify your working options under current contracts and maximize your company’s ability to take proactive steps to manage future tariff-related risks. Managing the effects of tariffs, or other unexpected governmental actions, requires a tailored approach based on each company’s contractual leverage and commercial relationships. A thorough contract review, coupled with proactive communication with business partners, can provide a solid foundation for addressing tariff challenges.
Congress Overturns IRS Reporting Rules for DeFi Platforms
President Trump has signed into law a bill that repeals Internal Revenue Service (IRS) regulations that required decentralized finance (DeFi) platforms to be treated as brokers for purposes of reporting customer transactions. The former regulations, finalized in December 2024 under the Biden administration, expanded the definition of “digital asset brokers,” to include certain participants that operate within the DeFi industry. Digital asset brokers are subject to tax reporting obligations similar to traditional financial intermediaries. Specifically, these brokers are required to issue IRS Form 1099-DA to both the IRS and their customers, detailing gross proceeds from digital asset transactions, as well as the name and address of each customer. Had the regulations remained in effect, DeFi brokers would have been subject to information reporting requirements for digital asset sales on or after Jan. 1, 2027.
The bill invoked the Congressional Review Act (CRA), a legislative tool allowing Congress to overturn recently enacted federal regulations, particularly those implemented late in an administration’s tenure.
Advocates of the repeal argued that the former regulations were overly burdensome and misaligned with the decentralized nature of DeFi platforms. They contended that forcing DeFi protocols, which often lack a centralized entity, to comply with broker reporting standards is technically infeasible. Critics of the regulations believed it would stifle innovation and push crypto enterprises offshore, undermining U.S. competitiveness in the digital asset sector. The repeal effort was led by Sen. Ted Cruz (R-TX) and Rep. Mike Carey (R-OH).
Opponents of the repeal warned that removing these reporting requirements may create loopholes for tax evasion and illicit financial activities, including money laundering. The Congressional Budget Office, relying on estimates provided by the Joint Committee on Taxation, projected a $4.5 billion increase in the federal deficit through 2035 from passage of the resolution. Critics argued that repealing the rule may allow more cryptocurrency transactions to evade scrutiny, potentially exacerbating financial crimes.
The repeal highlights the growing political influence of the cryptocurrency industry and a broader shift in Washington’s regulatory stance toward digital assets. As the larger debate unfolds, lawmakers and industry leaders will need to navigate the challenges of fostering innovation while maintaining financial security and compliance in the evolving digital economy.
Let the Shakedowns Begin: Tax False Claims Legislation in California
Legislators in Sacramento, California, are mulling over one of the most (if not the most) troubling state and local tax bills of the past decade.
Senate Bill (SB) 799, introduced earlier this year and recently amended, would expand the California False Claims Act (CFCA) by removing the “tax bar,” a prohibition that exists in the federal False Claims Act (FCA) and the vast majority of states with similar laws.
If enacted, SB 799 will open the floodgates for a cottage industry of financially driven plaintiffs’ lawyers to act as bounty hunters in the state and local tax arena. California taxpayers would be forced to defend themselves in high-stakes civil investigations and/or litigation – even when the California Attorney General’s Office declines to intervene. As seen in other states, this racket leads to abusive practices and undermines the goal of voluntary compliance in tax administration.
While the CFCA is intended to promote the discovery and prosecution of fraudulent behavior, Senator Ben Allen introduced the bill specifically to “protect public dollars and combat fraud.” The enumerated list of acts that lead to a CFCA violation does not require a finding of civil fraud. In fact, a taxpayer who “knowingly and improperly avoids, or decreases an obligation to pay or transmit money or property to the state or to any political subdivision” would be in violation of the CFCA (See Cal. Gov’t Code § 12651(a)(7)).
This standard is particularly inappropriate in the tax context and is tantamount to allowing vague accusations of noncompliance with the law, leading to taxpayers being hauled into court. Once there, taxpayers would be held hostage between an expensive legal battle and paying an extortion fee to settle. The CFCA is extremely punitive: Violators would be subject to (1) treble damages (i.e., three times the amount of the underreported tax, interest, and penalties), (2) an additional civil penalty of $5,500 to $11,000 for each violation, plus (3) the costs of the civil action to recover the damages and penalties (attorneys’ fees).
To the extent the action was raised by a private plaintiff (or relator) in a qui tam action, the recovered damages or settlement proceeds would be divided between the state and the relator, with the relator permitted to recover up to 50% of the proceeds (Cal. Gov’t Code § 12652(g)(3)). If the state attorney general or a local government attorney initiates the investigation or suit, a fixed 33% of the damages or settlement proceeds would be allotted to their office to support the ongoing investigation and prosecution of false claims (Cal. Gov’t Code § 12652(g)(1)).
Adding further insult to injury, the CFCA has its own statute of limitations independent of the tax laws. Specifically, the CFCA allows claims to be pursued for up to 10 years after the date the violation was committed (Cal. Gov’t Code § 12654(a)). A qui tam bounty hunter’s claim would supersede the tax statutes of limitations.
Next, the elements of a CFCA violation must only be shown “by a preponderance of the evidence” (Cal. Gov’t Code § 12654(c)). The common law burden of proof for fraud is by “clear and convincing evidence,” a much higher bar.
Absent amendments, SB 799 would put every significant California taxpayer in jeopardy when the taxpayer takes a legitimate tax return position on a gray area of the state or local tax law, even when the position was resolved through the California Department of Tax and Fee Administration, the California State Board of Equalization, the California Franchise Tax Board, or a local government. Settlement agreements, voluntary disclosure agreements, and audit closing agreements all would be disrupted if the attorney general or a plaintiff’s lawyer believes the underlying tax dispute or uncertainty is worth pursuing under the CFCA.
In countless cases in Illinois and New York, we have seen companies face False Claims Act shakedowns after the company already had been audited, had entered into a settlement with the state, or when the tax statute of limitations had long closed. SB 799 would bring the horrors experienced in Illinois and New York to taxpayers doing business in California.
Fundamentally, SB 799 threatens to open the litigation floodgates and undermine the authority of California tax administrators, putting tax administration in the hands of profit-seeking “whistleblower” bounty hunters. The goal of motivating whistleblowers and addressing tax fraud can be accomplished by simply adopting (and funding) a tax whistleblower program similar to the very successful programs offered by the Internal Revenue Service and many other states.
Ideally, SB 799 will be rejected in full or deferred for further consideration by an interim/study committee. With this in mind, the following amendments are essential to prevent the most severe abuses that stem from the CFCA’s application to tax.
Bring qui tam suits without government involvement. Eliminating the ability of private plaintiffs to bring qui tam suits without the involvement of the attorney general would significantly reduce the number of frivolous claims and give the state its sovereign right to decide whether a claim should be pursued under the CFCA. If this amendment is not accepted, companies that introduce new technology and innovative products will be at the greatest risk of being targeted for qui tam It is always the case that tax law does not keep up with technological advances. Thus, the gray areas of tax law will be most present for high-tech taxpayers.
Protect reasonable, good-faith tax positions. Companies should not be liable under the CFCA merely for taking a reasonable return position or otherwise attempting to comply with a reasonable interpretation of law. CFCA exposure should be limited to cases of specific intent to evade tax, proven by clear and convincing evidence. Tax law is notoriously murky, and good-faith disputes are what keep lawyers and accountants employed worldwide.
Defer to existing tax statutes. The CFCA should not override the California Revenue and Taxation Code provisions governing statutes of limitation or burden of proof.
Apply prospectively only. The CFCA should be limited in application to prospective matters (i.e., claims for taxable years beginning on or after January 1, 2026) to avoid retroactive liability and constitutional risk.
Additionally, there is an emerging body of caselaw involving the federal FCA, holding it violates the separation of powers under the US Constitution. Justice Thomas, in a dissent, suggested that the federal FCA might be unconstitutional because it transfers executive power to the private sector. A district court in Florida recently dismissed a qui tam action brought under the federal FCA on similar grounds. The California Constitution is structured like the US Constitution in this regard, with executive power vested in the governor and the attorney general serving as the chief law enforcement officer (See Cal. Const. art. V, §§ 1, 13). The qui tam provisions of the existing CFCA transfer these powers to private actors with no political accountability. It is likely these qui tam provisions of the CFCA similarly violate the California Constitution.
San Francisco Holds Hearing on Proposed New Sourcing Regulations Under Proposition M
On the heels of Proposition M—which mandates that the San Francisco Tax Collector adopt sourcing rules for determining the location of gross receipts—the San Francisco Office of the Treasurer & Tax Collector released proposed sourcing regulations, holding a hearing to discuss the matter on April 8, 2025.
Overview of the Proposed Regulations
The proposed regulations generally align with the California Franchise Tax Board (FTB)’s market-based sourcing rules, but diverge in certain areas:
1. Waterfall Approach to Sourcing: The regulations implement a waterfall (tiered) approach to sourcing gross receipts from:
Services and intangible property, including the use of customer-related data, books and records, or reasonable approximation; and
Financial instruments, which also follow a waterfall structure due to limitations on mirroring FTB’s treatment via regulation.
2. Industry-Specific Rules Excluded: The proposed regulations do not adopt some of the FTB’s special industry sourcing rules (e.g., rules applicable to partnerships, banks, and construction contractors).
3.Clarification on Apportionment: The Tax Collector’s Office explicitly notes that the proposed sourcing rules do not modify the apportionment rules and are solely intended to guide the sourcing of gross receipts within the apportionment formula.
Procedural Background and Public Hearing
On April 8, 2025, the Tax Collector’s Office held a public hearing to discuss the proposed regulations and solicit feedback. Highlights from the hearing include:
1.Comparative Reviews: Tax Collector Office Staff conducted comparative reviews of sourcing frameworks from the FTB and other jurisdictions.
2.Written Comments: Hearing officials confirmed that written comments were due by close of business on April 18, 2025. They specified that comments identifying specific clients will be treated as confidential, whereas general submissions will be public.
3.Oral Comments: There were also oral comments provided by industry representatives.
One private practice tax representative raised concerns over ambiguity in the treatment of asset management service providers.
A San Francisco Chamber of Commerce representative expressed support for consistency with FTB rules but requested clarity regarding the applicability of certain industry-specific rules. The Chamber representative also suggested the addition of a presumption of correctness in favor of taxpayers who follow the regulations.
Takeaways
The Tax Collector’s Office collected public comments on the proposed sourcing regulations on April 18, 2025. Based on these comments, additional hearings may be held to discuss the concerns raised by the public in response to the proposed sourcing regulations.
OFAC Issues Updated Guidance to Shipping and Maritime Sector Regarding Evasion of Iranian Oil Sanctions
On April 16, 2025, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued an update to its Sept. 2019 advisory, addressed to the global shipping and maritime sector, regarding sanctions evasion activities in connection with the shipment of Iranian-origin petroleum, petroleum products, and petrochemical products. The update was prompted by the Feb. 4, 2025 National Security Presidential Memorandum (NSPM-2), which directs the U.S. Department of the Treasury to implement a vigorous sanctions program to deny Iran and its terrorist proxies access to revenue.
Previously, on Oct. 11, 2024, Secretary of the Treasury Janet Yellen, in consultation with Secretary of State Anthony Blinken, had designated the petroleum and petrochemical sectors of the Iranian economy pursuant to Executive Order 13902, which authorizes the imposition of sanctions on any designated sector of the Iranian economy.
Iran relies on oil sales revenues to fund its malign activities, including its nuclear weapons and ballistic missile programs, and its support of terrorist groups. The oil shipments create significant sanctions risks for shipping companies, vessel owners, managers, operators, insurers, port operators, port service providers, financial institutions, and others in, or that work with, the maritime industry.
Iran’s Deceptive Practices
Iran-linked networks deploy an array of deceptive practices designed to circumvent sanctions, including:
Use of a “shadow fleet” of tankers. Iranian cargo is often transported on a shadow fleet of tankers, comprised of older, poorly maintained vessels that operate outside of standard maritime regulations. On Dec. 6, 2023, the International Maritime Organization (IMO) issued a resolution urging relevant stakeholders to avoid aiding illegal operations by the shadow fleet, but some stakeholders and jurisdictions continue to do so, by allowing substandard tankers to call at their ports; by overlooking adherence to international maritime regulations such as regular port state control inspections; and by providing bunkering, flagging, and crew management services to tankers sanctioned by OFAC or to other shadow fleet vessels. Iran also uses a separate shadow fleet of gas carriers to transport liquefied petroleum gas, primarily to China.
Use of ship-to-ship transfers to obscure origin and destination. While ship-to-ship (STS) transfers can be legitimate, Iran often uses multiple such transfers (typically three to five per shipment) to obfuscate the origin of the cargo and/or the involvement of sanctioned vessels. Multiple transfers are a strong risk factor for sanctions evasion. This is especially so when the transfers are conducted at night, in unsafe waters, near sanctioned jurisdictions, terminals, or refineries, or involve a vessel with missing or manipulated Automatic Identification System (AIS) data.
Use of falsified documents. To obscure the origin and destination of shipments, Iran-linked networks falsify cargo and vessel documents, including bills of lading, certificates of origin, invoices, packing lists, proof of insurance, and lists of last ports of call.
Disabling or tampering with AIS transponders. To mask their movements, including port calls and STS transfers, vessels transporting Iranian cargo often disable or tamper with their transponders. This is usually done together with other data manipulation, such as falsely reporting the Maritime Mobile Service Identity (MMSI) number or IMO number of the vessel. The updated guidance cautions not to rely solely on a single data point in verifying vessel activity for compliance.
Use of complex vessel ownership and management structures. Iran-linked networks use multiple shell companies and vessel-owning SPVs in high-risk, low-transparency, and low-regulation jurisdictions. Ship brokers in lax jurisdictions help facilitate transfers between and among shell companies.
Oil brokering networks. Oil brokers outside Iran help facilitate sales of Iranian petroleum and petroleum products, largely to China, often several steps removed from the initial sale. These oil brokers frequently create or distribute falsified documents, as noted above.
Identifying and Mitigating Sanctions Risks
To safeguard against these practices, and to avoid unwitting violations of sanctions laws, the updated guidance advises maritime sector stakeholders to review their sanctions compliance programs, and to enhance their due diligence and strengthen their internal controls as appropriate. The recommendations include:
Verify cargo origin. Recipients of cargo should conduct due diligence to corroborate the origin of goods. Red flags include vessels exhibiting deceptive behavior, or suspected links to sanctioned persons or locations. Testing samples of the cargo can reveal chemical signatures unique to Iran’s oil fields. Certificates of origin from Oman, the UAE, Iraq, Malaysia, or Singapore should be thoroughly investigated. Shipowners or charterers involved in STS transfers should request documentation regarding vessel STS history or verification of the last time the tank of the offloading vessel was empty, to ensure the cargo is not of Iranian origin.
Verify insurance. Parties should verify that vessels have adequate and legitimate insurance coverage, and are not relying on sanctioned insurance providers, or on new and untested providers without valid basis.
Verify flag registration. Vessels registered in jurisdictions known to service shadow fleet vessels, or that have flown multiple flags in a short period of time should be investigated as to ownership, voyage history, and flag history. The IMO’s Global Integrated Shipping Information (GISIS) database should be checked, to see if the vessel is flying a “FALSE” or “UNKNOWN” flag.
Review shipping documentation. Any indication that shipping documentation has been manipulated is a red flag that should be fully investigated. Documents related to STS transfers should establish that the cargo was delivered to the port reflected on the shipping documentation.
Know your customer (KYC) and know your vessel (KYV). In addition to conducting KYC due diligence (enhanced as appropriate), there should be KYV due diligence conducted on vessels, vessel owners, ultimate beneficial owners and group ultimate owners, and operators involved in contracts, shipments, and related maritime transactions. For vessels, this includes researching the IMO number and vessel history, including travel patterns, available STS history, ownership history, insurance, flag history, ties to evasive activities, actors, or regimes, and assessing risks associated with the owners, operators, or managers.
Monitor for manipulation of vessel location data. Irregularities in AIS data (including gaps in the data) could indicate manipulation, a serious red flag, warranting enhanced due diligence before further engagement.
Implement contractual controls. Contracts should contain representations and warranties that counterparties are not engaging in activity that violate, or that would cause a U.S. person to violate, U.S. sanctions laws, and that allow termination when such circumstances arise. In addition, contracts should allow termination based on certain types of suspicious activity.
Refuse service or port entry to sanctioned vessels. Port agents, operators, and terminals should engage in due diligence to ascertain whether a vessel is sanctioned, and should refuse service or port entry to such vessels.
Leverage available resources. A fair amount of information is available through open-source databases and from organizations in the maritime sector. These resources should be consulted.
The U.S. government continues to prioritize efforts to curtail Iran’s ability to generate revenue from its energy sector. Iran-linked networks have been finding ways to thwart U.S. sanctions. Companies in the maritime sector are particularly at risk of sanctions violations, which – even if inadvertent – potentially carry steep penalties, as the OFAC sanctions program is a “strict liability” regime. Up-to-date sanctions compliance programs are essential. Katten is ready to assist in implementing and upgrading sanctions compliance programs, and guiding clients through these deep and turbulent waters.
In Welcome News for Tax Whistleblowers, IRS Whistleblower Office Releases Operating Plan
Today, the Internal Revenue Service (IRS) Whistleblower Office released its first-ever multi-year operating plan, “outlining guiding principles, strategic priorities, recent achievements and current initiatives to advance the IRS Whistleblower Program.”
“This is welcome news for IRS whistleblowers whose cases languish for years, sometimes up to a decade or more, before the whistleblower can be paid an award,” says David Colapinto.
“This is an important step forward,” adds Stephen M. Kohn. “This is a critical program that has been held back by antiquated regulations. It’s time to modernize the program and effectively prosecute tax evaders.”
The plan lays out six strategic priorities:
Enhance the claim submission process to promote greater efficiency.
Use high-value whistleblower information effectively.
Award whistleblowers fairly and as soon as possible.
Keep whistleblowers informed of the status of their claims and the basis for IRS decisions on claims.
Safeguard whistleblower and taxpayer information.
Ensure that our workforce is supported with effective tools, technology, training and other resources.
“Of particular interest to the whistleblower community is the IRS’ emphasis on increasing efficiencies to speed up the process and issuing whistleblower awards faster and as soon as possible,” Colapinto adds.
“While paying whistleblower awards can incentivize other whistleblowers to report major tax fraud by wealthy tax cheats, the failure to pay whistleblower awards timely by taking over a decade to make payments, can act as a disincentive to blowing the whistle,” Colapinto adds. “This is an important step towards making the IRS whistleblower program more effective. To date, the IRS reports that it has collected more than $7.4 billion in taxes attributable to whistleblowers reporting tax fraud and underpayments. The IRS Whistleblower Program has potential to collect even more if it improves its program to encourage more whistleblowers to come forward.”
Modernized in 2006, the IRS Whistleblower Program offers monetary awards to whistleblowers who voluntarily provide original information about tax noncompliance. While the program has resulted in the collection of billions of dollars, in recent years payouts to whistleblowers have dipped while the processing time for award payments have risen to over 11 years on average.
Since taking over as the Director of the IRS Whistleblower Office in 2022, John Hinman has overseen a number of administrative reforms aimed at making the program more efficient and effective, including increasing staffing at the office and disaggregating whistleblower claims to speed up award payouts.
While the newly released operating plan promises to make needed changes to the IRS Whistleblower Program, Congressional reforms are also needed. In January, Senators Ron Wyden (D-OR) and Mike Crapo (R-ID) unveiled a discussion draft of a bipartisan IRS reform bill which contains reforms to the IRS Whistleblower Program previously found in the IRS Whistleblower Improvement Act of 2023.
Geoff Schweller also contributed to this article.