Universal Service Fund Audits & Appeals – Primer on Processes and Risks


Through the years, both our law firm and its affiliated consulting arm, The Commpliance Group, have represented hundreds of telecommunications and VoIP service providers with an assortment of legal and regulatory compliance matters on a nationwide basis.  More than any other area of communications regulation, the one that has confounded our clients and the industry at large has been, and continues to be, the Federal Communications Commission’s (“FCC”) Universal Service Fund (“USF”) program and the administration/enforcement of the program by the Universal Service Administrative Company (“USAC”).

In recent times our law firm has been called upon to represent numerous clients with USF contributor audits initiated by USAC and, with few exceptions, the resulting administrative FCC appeals of adverse USAC audit decisions.  Our collective experience representing clients BEFORE, DURING and AFTER such USAC audits has shed tremendous amounts of light onto what was, heretofore, a rather opaque, fluid and uncertain process. 

In the interests of sharing knowledge and educating clients about the FCC Form 499 revenue reporting, USAC audit, and FCC appeals processes, we have reflected on our experiences and compiled the following “Primer.”  We hope you find the following information both useful and informative.


A.  The Role of the FCC, the Universal Service Administrative Company  and the Court in Universal Service Fund Audits

In 1996, Congress directed the Federal Communications Commission (“FCC”) to establish the Universal Service Fund (“USF”) mechanisms to preserve and advance universal service.[1]  The FCC delegated the day-to-day management and administration of the USF to the Universal Service Administrative Company (“USAC”).[2]  USAC could not, and did not, receive authority to create, change or interpret substantive rules and regulations.[3]  USAC could only adopt and follow administrative processes and procedures to implement the Commission’s substantive rules.[4]  For several years subsequent to its creation, USAC played a limited and narrow role administering its duties as the Data Collection and Billing Agent by applying the FCC’s substantive rules and orders.  However, in more recent times, USAC has played an increasingly active, important, and, some would say “aggressive” role.  At times, USAC has appeared to act as an extra-governmental “adjudicatory arm” that actively and knowingly moves the goal posts to achieve its fundamental mission – which is “to preserve and enhance” the stability and predictability of the USF programs.

By and large, USAC has leveraged its audit authority to achieve the aforementioned goals.  In accordance with FCC rules, USAC can audit contributors to ensure accurate revenue reporting and calculation of USF contribution liabilities.[5]  The FCC’s rules, however, contain little guidance on the specifics of USAC’s audit authority.  In recent years, USAC has taken full advantage of this lack of clarity and, with the FCC’s blessings (or purposefully blind eyes), has frequently used the audit process as a crucible for interpreting and expanding the meaning of Commission rules, adopting new policies, and enforcing “rules” with a noticeable slant in the direction of increased USF contributions.  The FCC, in turn, has increasingly relied upon USAC audits and the resulting adjudications (Petitions for Review of USAC Audits) to clarify rules and create new precedent.

Appeals of USAC audits have languished before the Commission for years.  The Commission has been unwilling to take actions that rebut USAC’s audit findings because, by and large, USAC audit decisions have resulted in increased USF contributions.  The FCC has been equally reluctant to decide appeals that would provide well-funded contributors with a final administrative action that could be appealed to the appellate courts.  The combination of an aggressive, somewhat unrestrained USAC, the purposefully slow FCC appeals process, USAC’s “Pay and Dispute” policy and lack of a recognized limitations period (issues we expound upon below), has created a paradigm that stacks the deck against aggressive revenue reporting positions.  On the other hand, sky high contribution factors and the unequal application of regulatory fees to different technologies used to provide comparable, substitute services create undeniable competitive pressures to pursue lawful mitigation of said fees.  The overarching challenge is defining what “lawful” means when USAC is given the freedom to move the goal posts whenever USAC concludes it is necessary to fulfill its mission of ensuring the stability and predictability of the USF.

Over the past several years, USAC has matured as an organization and has simultaneously become emboldened by FCC acquiescence and support and, recently, appellate review.  The Commission has generally upheld USAC’s findings or avoided addressing audit challenges; and, in those few rare instances where the court has been given the opportunity to consider a challenge to USAC’s unbridled authority, procedural hurdles have prevented a review on the merits.  For example, in a recent decision, the Court of Appeals for the D.C. Circuit (“D.C. Circuit”) found that the petitioner lacked standing to challenge the FCC’s 2008 InterCall Order, issued in response to InterCall’s challenge to a USAC audit decision finding InterCall’s services to be USF assessable, and a 2012 petition for reconsideration of the InterCall Order.[6]  The D.C. Circuit determined that the InterCall Order was an adjudication, and because the petitioner was not a party to the adjudication, it lacked standing under Article III of the Constitution to challenge the ruling.[7]

With this ruling, the D.C. Circuit deferred substantially to the FCC to interpret its rules in upholding the determinations of USAC.  Accordingly, the D.C. Circuit has now plainly stated that it will not be easily persuaded to address the harms caused by the FCC’s continued deferral to USAC.  In this environment, USF contributors must be very thoughtful about their reporting decisions and recognize the potential risks and consequences of taking a position that is contrary to the Form 499-A Instructions or policies adopted by USAC.  Keeping this in mind, the following discusses the potential reporting options available to service providers, risks associated with the various options, and the consequences of adopting certain positions.

B.    Weight Given to FCC Form 499-A Instructions in USAC Audits

Technically speaking, the Form 499-A Instructions do not carry the weight of the law, and are intended to function only as guidance for filers.[8]  USAC, however, strictly adheres to the Instructions, and reclassifies the revenues of filers that fail to follow the Instructions.  While the full Commission has never expressly recognized USAC’s right to reclassify revenues, the Wireline Competition Bureau (“Bureau”) has determined that USAC possesses the authority to reclassify revenues, and the Commission has implicitly endorsed this finding.[9]  Accordingly, any filer that fails to abide by the Instructions risks reclassification of revenues with serious procedural and financial consequences, as discussed below.

C.    Procedural and Financial Consequences of Adverse USAC Audit Determinations Resulting in Revenue Reclassification and Increased USF Contribution Invoice Amounts

A service provider that fails to abide strictly by the Form 499-A Instructions and USAC “guidance” risks reclassification of revenues, and the issuance of supplemental invoices for USF fees.  Failure to pay any such invoice results in a “contributor delinquency.”[10]  If the contributor fails to pay the invoice by the due date, USAC will send an initial notice of delinquency.  The notice explains that the contributor’s account has been placed in “Red Light” status.  Red Light status prevents a contributor and its affiliates (any companies sharing a Tax ID with the delinquent company) from receiving any disbursements from USAC.[11]

If the invoiced amount is overdue by more than 30 days, USAC sends a second notice that identifies the delinquent amount, and also requires the contributor to contact USAC for the final pay-off amount, which may include penalties and interest.[12]  The second notice does not identify the amount of penalties and/or interest owed, which can be significant.  If a USF contribution amount is past due by one day it becomes a “debt” subject to the Debt Collection Improvement Act (“DCIA”).[13]  Accordingly, the DCIA governs the amount of interest to be applied to the outstanding debt.  Interest is applied at the prime rate as of the date of delinquency plus 3.5%.[14]  Moreover, if the debt remains unpaid for over 90 days past the due date, an additional penalty of 6% per year is applied, calculated from the original delinquency date.[15]

If the invoice remains unpaid after 60 days, USAC sends a third notice which likewise includes the principal balance and invites the contributor to contact USAC for the full amount due. Finally, if an invoice remains unpaid for more than 90 days, USAC sends a final notice.  This includes the same information contained in the prior notices, but also notifies the contributor that failure to pay the full delinquent amount within 30 days will result in a transfer of this “debt” to the Department of Treasury for collection pursuant to the DCIA.[16]  In addition, administrative costs of 28% of the debt will be imposed on any debt transferred to Treasury under the DCIA.[17]

A contributor that disagrees with an assessment can appeal either to USAC or directly to the FCC.  An appeal must be filed within 60 days of the invoice date.[18]  If the contributor elects to first appeal with USAC, it can appeal an adverse USAC decision to the FCC within 60 days.[19]  USAC has adopted a “pay and dispute” policy, which the FCC has endorsed.[20]  USAC requires contributors to pay all outstanding invoices prior to disputing in order to avoid continued accrual of interest and penalties.[21] Even though interest and penalties will continue to accrue on any unpaid amounts, the debt will not be transferred for collection under the DCIA and is not subject to the Red Light Rule if it is subject to an appeal.[22]  As confirmed by the recent Ascent Media decision, these fees can be waived only by the Commission.[23]  Otherwise, penalties and interest will not be removed unless and until an appeal is successful before USAC, the FCC, or a reviewing court.[24]

On top of the additional USF fees, penalties and interest assessed by USAC, a filer could also be subject to forfeitures for non-compliance with FCC rules as a result of ignoring reporting instructions or USAC audit findings.  A provider that fails to make required USF contributions can be subject to FCC forfeiture penalties of at least $10,000 for each month in which a provider does not fully satisfy its required USF contributions, and at least $20,000 for each month in which a provider does not make any USF contributions.[25]  The Commission has also imposed upward adjustments based on approximately one-half of the largest amount of the filer’s unpaid USF contributions during the period covered by the Commission’s investigation.[26]  In addition, the Commission has treated failures to pay universal service and other obligations as continuing violations that are not cured until the belated filing is made.[27]  In 2008, the Commission proposed a $10 million penalty on Global Crossing North America, Inc. for failure to make its required USF contributions.


As a result of the “framework” described above, Form 499 filers must take their revenue reporting decisions seriously and recognize that any material departure from the Form 499 Instructions risks serious financial consequences.  The likelihood of success of any appeal of a USAC audit decision or invoice varies based upon the strength of the legal position supporting the challenge.  But, regardless of the chances of success, any appeal will be an expensive uphill battle and could potentially embroil the petitioner in litigation for years.  Of course, these considerations must all be weighed by management in determining how to address any potential USAC audit or reclassification instruction.

If you are concerned about your company’s FCC Form 499 / USF compliance profile and want to achieve greater peace of mind, contact The CommLaw Group today and inquire about our USAC Compliance, Audit Preparation and Defense Practice.

DISCLAIMERS:  This Advisory has been prepared for informational purposes only.  It is not for the purpose of providing legal advice and does not create an attorney-client relationship between Marashlian & Donahue, LLC and you.  You should not act upon the information set forth herein without seeking experienced counsel.   This Advisory may be considered Attorney Advertising in certain jurisdictions.  The determination of the need for legal services and the choice of lawyer are extremely important decisions and should not be based solely upon advertisements or self-proclaimed expertise.

[1] Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (codified as amended at 47 U.S.C. § 254(a)).

[2] See In re Changes to the Board of Directors of the National Exchange Carrier Association, Inc., Federal-State Joint Board on Universal Service, Report and Order and Second Order on Reconsideration, 12 F.C.C.R. 18400, ¶ 11 (July 17, 1997) (“USAC Order”).  The FCC designated USAC as the interim USF Administrator in 1997. USAC became permanent Fund Administrator in 1998.  See In re Changes to the Board of Directors of the National Exchange Carrier Association, Third Report and Order, CC Docket No. 97-21, Fourth Order on Reconsideration in CC Docket No. 97-21 and Eighth Order on Reconsideration in CC Docket No. 96-45, 13 F.C.C.R. 25058, 25069-70, ¶ 20 (Nov. 19, 1998).

[3] See, e.g., 47 C.F.R. § 54.702(c); see also USAC Order at 18425-28, ¶¶ 41-51.

[4] Id.

[5] 47 C.F.R. § 54.707.

[6] Conference Grp., LLC v. F.C.C., 12-1124, 2013 WL 3305698 at *1 (D.C. Cir. July 2, 2013).

[7] Id.  In the Matter of Federal-State Joint Board on Universal Service, Request for Review of Decision of the Universal Service Administrator by Global Crossing Bandwidth, Inc., Order – Wireline Competition Bureau, 24 FCC Rcd. 10824, 10828 (Aug. 17, 2009) (“GX Order”) (“Although the Commission has not dictated how a carrier may meet the reasonable expectation standard, it has provided guidance in the FCC Form 499-A instructions.”) (emphasis added); Id. at 10830 (“[T]he instructions are indeed guidance from the Commission on how wholesale carriers may substantiate their customers’ reseller status.”) (emphasis added); In the Matter of Universal Service Contribution Methodology, Request for Review of Decision of Universal Service Administrator by Network Enhanced Telecom, LLP, Order- Wireline Competition Bureau, 26 FCC Rcd. 6169, 6171 (Apr. 26, 2011); In the Matter of Universal Serv. Contribution MethodologyRequest for Review of Decision of the Universal Service Administrator by Network Enhanced Telecom, LLP, Order- Wireline Competition Bureau, 25 F.C.C.R. 14533, 14536 (Oct. 19, 2010); In the Matter of Universal Service Contribution Methodology, a Broadband Plan for our Future, Order – Commission, 27 FCC Rcd. 5357, 5418 (Apr. 30, 2012).

[9] Only one Bureau-level decision has concluded that USAC is authorized to reclassify revenues.  GX Order,24 F.C.C.R. at 10825-26.  As a Bureau-level decision, this order does not carry the weight of the law.

[10] In the Matter of Comprehensive Review of the Universal Serv. Fund Mgmt., Admin., & Oversight Fed.-State Joint Bd. on Universal Serv. Sch. & Libraries Universal Serv. Support Mechanism Rural Health Care Support Mechanism Lifeline & Link-Up Changes to the Bd. of Directors for the Nat’l Exch. Carrier Ass’n, Inc., 22 F.C.C.R. 16372, 16381 (2007) (“USF Debt Order”) (“The date of payment on the invoice is the due date. If full payment is not received by the date due, the debt is delinquent.”).  Reclassifications likewise could result in additional invoices for TRS or other program fund fees.  Failure to pay these invoices by the due date results in an “FCC delinquency.”

[11] Amendment of Parts 0 and 1 of the Commission’s Rules; Implementation of the Debt Collection Improvement Act of 1996 and Adoption of Rules Governing Applications or Requests for Benefits by Delinquent Debtors, MD Docket No. 02-339, Report and Order, FCC 04-72, 19 FCC Rcd. 6540 (2004) (implementing Pub. L. No. 104-134, 110 Stat. 1321, 1358 (1996)) (“Debt Collection Report and Order”).

[12] See, e.g., USAC Contributor Delinquency Slideshow (June 2013) at https://usac.org/_res/flash/cont/Contributor%20Delinquency/player.html.

[13] USF Debt Order, 22 F.C.C.R. at 16381 (“[T]he unpaid amount is a debt owed to the United States.”).

[14] 31 U.S.C. § 3717; 31 C.F.R. § 285.12(j).

[15] USF Debt Order, 22 F.C.C.R. at 16381.

[16] USF Debt Order, 22 F.C.C.R. at 16381.

[17] USF Debt Order, 22 F.C.C.R. at 16399, n. 50.

[18] The FCC has adopted USAC’s position that an invoice qualifies a decision, and the date of issuance starts the 60-day appeals clock under 47 C.F.R. § 54.720(a).  USAC’s invoices advise:  “If you wish to appeal this invoice, you may file an appeal within 60 days of the statement date on the invoice pursuant to the requirements of 47 C.F.R. Part 54, Subpart I. Detailed instructions for filing appeals are available at https://www.usac.org/cont/about/program-integrity/appeals.aspx.”  See USAC invoice attached to Mercury Wireless, Request for Waiver – USAC late filing fees, filed Aug. 15, 2012, available at https://apps.fcc.gov/ecfs/document/view?id=7022004590.

[19] 47 C.F.R. § 54.720(a).

[20] In the Matter of Universal Serv. Contribution Methodology, 23 F.C.C.R. 17903, 17907 (2008).  Also note that USAC applies a payment toward any delinquent amount to the oldest outstanding interest and penalties first, followed by principal.  USF Debt Order, 22 F.C.C.R. at 16399 n. 51 (2007) (“It is USAC’s practice to apply partial payments to the oldest debt carried on USAC’s books first, and not to the current billed amount.”) citing North American Telephone Network, LLC, Forfeiture Order, 16 FCC Rcd. 4838, ¶ 8 & n.12 (2001); Intellicall Operator Services, Forfeiture Order, 15 FCC Rcd. 21771, 21772, ¶ 6 and n.8 (2000).

[21] Id.

[22] See, e.g., USAC Contributor Delinquency Slideshow (June 2013) at https://usac.org/_res/flash/cont/Contributor%20Delinquency/player.html.

[23] In the Matter of Universal Service Contribution Methodology, Petition for Reconsideration by Ascent Media Group, Inc., WC Docket No. 06-12, Order on Reconsideration, DA 13-966 at ¶ 5 (May 3, 2013); Universal Service Contribution Methodology, A National Broadband Plan For Our Future, WC Docket No. 06-122, GN Docket No. 09-51, Further Notice of Proposed Rulemaking, 27 FCC Rcd. 5357, 5482, ¶ 362 (2012); 47 C.F.R. § 54.702(c); See also In the Matter of Universal Serv. Contribution Methodology, 23 F.C.C.R. 17903, 17907 (2008).

[24] Id.

[25] See, e.g., Kajeet Inc. and Kajeet/Airlink, LLC, Notice of Apparent Liability for Forfeiture and Order, 26 FCC Rcd. 16684,16694, ¶ 21 (2011) (“Kajeet NAL”); ADMA Telecom, Inc., Forfeiture Order, 26 FCC Rcd. 4152, 4158, ¶ 15 (2011) (“ADMA Forfeiture Order”); NTS Communications, Inc., Notice of Apparent Liability for Forfeiture, 25 FCC Rcd. 5137, 5142, ¶¶ 12–13 (2010) (“NTS NAL”); Telrite Corp., Notice of Apparent Liability for Forfeiture, 23 FCC Rcd. 7231, 7242–44, ¶¶ 25–28 (2008) (“Telrite NAL”); OCMC, Inc., Order of Forfeiture, 21 FCC Rcd. 10479, 10482, ¶ 10 (2006); Globcom, Inc., Order of Forfeiture, 21 FCC Rcd. 4710, 4721–24, ¶¶ 31–38 (2006) (“Globcom Forfeiture Order”).

[26] See, e.g., Kajeet NAL, 26 FCC Rcd. at 16696, ¶ 26; ADMA Telecom, Inc., Notice of Apparent Liability for Forfeiture, 24 FCC Rcd. 838, 852–53, ¶ 34 (2009)(“ADMA NAL”); Telrite NAL, 23 FCC Rcd. at 7243, ¶ 28.

[27] See, e.g., Kajeet NAL, 26 FCC Rcd. at 16694, ¶ 21; ADMA Forfeiture Order, 26 FCC Rcd. at 4159, n.56; Telrite NAL, 23 FCC Rcd. at 7245–46, ¶ 36.

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