Declare the correct value on the Customs form?

During my career with the USPS, I worked a short stint as a window clerk. We made it a practice to inform shippers sending valuable items to certain foreign countries NOT to purchase insurance or send their item Registered. Both services required labels that thieves looked for. You need to remember that once it leaves the US, you are no longer dealing with supposedly honest American government employees, you're dealing with other country's officials, for however many countries it travels through. This may be why the seller made the request, as the Customs label has to be affixed to the outside of the package with the declared value clearly printed on it. Foreign customs officials don't tend to suspect contraband being shipped from the US, so they would not likely be interested enough in a low balled value to actually open the package for inspection. Likewise, a thief wouldn't be interested either.

Probably best not to make a habit of it.  The album reveal is worth a thread of its own. 

the full refund is assured via PayPal and my VISA (based on prior experience alas). 

I took that advice and still lost a $350 @sph part sent to Malaysia. With no recompense. 

certain foreign countries NOT to purchase insurance or send their item Registered

Where is there any potential for “fraud”? It’s a friggin’ record, for goodness sake. The person who may have committed fraud is the seller. We’re not talking about diamonds or precious metals or any other commodity that has a commonly understood value scale. If the thing is not what the seller said it was, it probably isn’t even worth $50. And again, you’re returning an already used item to its place of origin. On a US Customs form, that is a category for which there is no charge.

I live in the EU and can testify that any import shipment from the countries outside will be charged with so called 'Vat' tax (around 20 percent, depending of country) and that tax will be charged on cost of goods and cost of transport (shipping) together. To import something  and not pay import tax (like a gear that you have send for repair) you need to make such papers with official fast forwarder (that also cost, usually from 100usd and above). So, the mentioned seller is probably just trying to avoid more potential costs, since record, if declared for 1200usd will be taxed for some 25 percent or more, when received. It is possible to declare a lesser value and still have it insured with carrier for bigger amount, at least from EU side