Universal Service Fund Contributor Audits
By now, everyone operating in the US telecommunications industry should be quite familiar with the Universal Service Administrative Company (USAC), the Universal Service Fund (USF), and the FCC Form 499 (Form 499) filings your telecommunications company is required to remit to USAC on a quarterly and/or annual basis. If you are reading this column and terms like “USAC,” “USF” and “Form 499” aren’t registering in your conscious mind, I implore you to locate and consult with an experienced telecommunications regulatory professional or attorney. The consequences of non-compliance with, what is arguably the single most important federal regulatory program affecting the telecom industry, can be serious and debilitating if not promptly addressed. For the rest of our readers who are already “in the system” and have had their fair share of Form 499 revenue reporting experiences, USAC invoices, and supplier/reseller USF exemption certifications over the years, the purpose of this column is to educate you regarding the: (1) likelihood of becoming targeted for a USAC contributor audit, (2) audit process itself, and (3) potential consequences of a USAC contributor audit, particularly where USAC identified revenue reporting errors or inconsistencies.
The Form 499 revenue reporting forms, related instructions and USAC’s administration of the Universal Service Fund through its role as administrator of the USF program are a source of great controversy with carriers. This is because of the inconsistency and vagueness of the forms and accompanying instructions and the unpredictable nature of USAC interpretation and application of FCC Rules. USAC has been under tremendous pressure to shore up the Universal Service Fund because the contribution base of traditional “interstate telecommunications” has been shrinking while expenses rise. Technology is evolving rapidly, and integrated information services are increasingly displacing old telecommunications-only services, shrinking the revenue base subject to USF assessment under existing rules. Due to FCC and Congressional inaction on fundamental reform of the USF and the perpetual demand to fund the $8 billion a year program, USAC has consistently pushed the envelope of its authority and, at times, the rational application of FCC rules in order to tap into contribution revenue sources. Two traditional telecommunications services that have been targeted by USAC in recent years include prepaid and international telecommunications. Without any indication that much-needed fundamental reform of the USF program is on the horizon, USAC is and will remain under increased pressure to extract USF contribution revenue from traditional sources of telecommunications. In turn, this pressure is likely to lead to additional contributor audits in the coming months and years.
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Are you prepared to respond to a USAC audit inquiry?
Ask yourself the following questions:
“Does your company have revenue reporting procedures and verification of reported revenues available to respond to the initial information requests typical in a USAC audit within 15 days of an audit notice?”
“Do you feel confident in the ability of your company to locate the information required for such an audit?”
“If USAC reclassifies revenue and issues USF invoices based on its audit findings, will you have the means to pay the invoiced amounts even if you choose to appeal the decision?”
Contending with a USAC audit and its aftermath can be an onerous, uncomfortable and frightening experience for telecom service providers. Many companies have reported the need to devote hundreds of man hours to meet the request for information during these audits. Through both formal Audits and informal Desk Reviews, USAC will exhaustively evaluate your company’s compliance with myriad accounting, jurisdictionalization and revenue reporting rules emanating from the ever-changing regulatory landscape. USAC conducts such inquiries based on the year-end “True-Up” revenue report, also known as the Form 499-A (due April 1 of each year).
Upon receipt of a USAC audit notice, your company is expected to respond to thorough initial USAC information requests within two weeks. These initial requests are based on information and procedures that a filer would reasonably be expected to have on hand to support revenue reported for the year in question. If you have not maintained adequate documentation along the way, you will have very little time to polish them up before USAC auditors begin their examination. Without any limitations period on USAC’s ability and willingness to look back in time to identify under-reported revenue and missing contributions, the stakes are incredibly high. Responses to initial information requests then provide USAC auditors a basis for determining the scope of audit inquiries over the subsequent months, including developing an agenda for on-site examinations.
Recent Petitions for Review of USAC contributor audit findings filed by Puerto Rico Telephone Company and Critical Alert Systems illuminate the critical importance of revenue allocation practices, policies and documentation thereof when it comes to Form 499 revenue reporting. Another area that has received intense USAC attention in recent contributor audits has been compliance with the “Carrier’s Carrier Rule,” which governs the relationships between Wholesalers and Resellers and which entity is entitled to report revenue as “wholesale” and exempt from USF contributions and under what conditions.
The Petitions and recent USAC audit activities reinforce the widely held perception that USAC is myopically and, at times, unjustifiably focused on reaching conclusions that result in upward adjustments to contribution obligations, almost to the point of being pre-ordained outcomes. This is the same perception that is almost universally associated with all auditors, whether from the Internal Revenue Service (“IRS”) or state taxing authorities, so it should not be surprising that USAC auditors tend to fall into the same camp.
The Petitions and recent audit experiences also highlight several trends associated with USAC decision-making. First, USAC will strictly adhere to the Form 499 Instructions when doing so suits its objectives. Second, in the audit setting, USAC will broadly interpret FCC rules and precedent when doing so suits its objectives, even though USAC’s charter does not permit USAC to “interpret” rules. And third, USAC is unafraid to render adverse audit findings based on tenuous interpretations because it can toss the difficult decisions to the FCC simply by putting the aggrieved contributor in the position of having to decide whether to “pay up” or spend money, time and effort pursuing an appeal before the FCC – knowing full well that the FCC, on average, takes five or more years to issue decisions on audit appeals. All the while, the contributor is subjected to the “Pay and Dispute” policy, which requires payment of all disputed amounts prior to filing an appeal in order to avoid onerous, compounding interest penalties that can be well north of 10 percent. The only way to avoid the penalty interest is to win your appeal; and five plus years can be a long, long time when USAC is applying 10% interest penalties to unpaid, disputed amounts.
In short, the message being expressed in the recent Petitions, in the slew of audit appeals over the past several years, and in the context of active USAC audits is that filers should apply extreme conservatism in the interpretation and application of 499 Instructions, FCC rules and precedent in order to mitigate risk associated with a USAC audit. The alternative to extreme conservatism is adherence to the underlying FCC rules, regulations, precedents and policies, but with the constant knowledge that vindication of your position may have to await a full and fair review by the FCC on appeal; all while having to live with or fight to stave off enforcement of USAC’s “Pay and Dispute” policy.
What can I do?
The increasingly complex regulatory environment is making it imperative for communications companies to stay abreast of changing regulatory compliance requirements. Last year was no exception, as the FCC continued to clarify, expand and enhance its enforcement of regulations specifically targeting the USF program. Failure to keep up with the myriad changes emanating from the FCC can cause internal accounting, billing and revenue reporting systems to lapse, potentially resulting in non-compliance with both federal and state regulatory requirements. With new or changing regulation also comes increasingly complex revenue reporting and heightened regulatory scrutiny. More stringent accountability standards mean communications companies across all tiers are expected to enhance their control, monitoring, reporting and compliance capabilities.
At the outset, companies and their affiliates must take a fresh look at whether revenue, or portions of revenues, from their services and products are or have become subject to USF assessment. Once a thorough categorization of revenues is complete, companies must be sure that they have documented procedures for line revenue reporting, collection of USF pass-throughs, determination of reseller/wholeseller status, allocating revenues among jurisdictions and other reporting procedures. In an audit, auditors will test whether, for a given year, these procedures are reasonable, based on information current for the calendar year in question, and repeatable. Filers must have documentation in place to verify revenue amounts reported, that the revenue reporting worksheet gives USAC a complete picture of all revenues earned, and that the filer has adequate controls in place to ensure that revenues reported are accurate and complete. All of these aspects of revenue reporting to USAC require a fresh look each year as adjudicated audit decisions and FCC precedent alter the regulatory landscape for the entire industry.
The most important things you can do to help your business avoid a USAC audit, in the first instance, and contend with an audit if your number is drawn are as follows: (1) educate yourself regarding the issues, risks and consequences of non-compliance, (2) implement policies and practices that are consistent with the Form 499 Instructions and underlying FCC Rules, and (3) be prepared to respond to an audit inquiry with documentation and evidence of your company’s compliance. •
Jonathan S. Marashlian is the Managing Partner at Marashlian & Donahue, LLC, The CommLaw Group, a Washington, DC-area law firm specializing in federal and state telecom and technology matters. Marashlian is the winner of two 2013 Lexology/International Law Office Client Choice Awards, named overall winner in the Telecommunications Law-US category; his firm was recently named Leading Customer Service Law Firm of the Year in the US by ACQ Global Awards. Linda McReynolds, a Senior Associate at the firm and active member of the firm’s USAC Compliance, Audit Preparation and Defense practice group, assisted in the preparation of this article.
Disclaimer: This article is intended for informational purposes only and is not for the purpose of providing legal advice. You should not act upon the information in this article without seeking professional counsel.