Top management has told me that "in our quality system we have defined nonconformances as nonconforming parts found at final inspection or the customer, that way we only have to track and provide corrective actions on nonconformances that are discovered at final inspection, not at the work station." There are a few boxes or racks of parts that are scrap or rework at the workstations, and those are just thrown out or reworked when the operator or supervisor gets to it. They aren't tagged, except when an auditor is around ...
Wow...I actually stared at this post and re-read goodness knows how many times before feeling calm enough to post. rdd007, first off, please understand that any seemingly harsh posts are not directed to you personally. I think that many of us are in shock at this definition and we sympathize with your situation. I doubt any of us would want to be in your shoes right now.
To be honest, I don't believe that this definition will hold much weight with an auditor. I think that you've internally met the requirements for 8.3, although perhaps the auditor could take the route of you providing evidence of concession for the internal customer (i.e., the final inspection station accepting all products from the earlier work station no matter if they have defects).
If the definition of your nonconforming product is accepted by the auditor, I see potential findings elsewhere....
8.4 Analysis of data "....shall provide information relating to...(c) characterisitics and trends of processes and products including opportunities for preventive action..." - Your organization is throwing away defective parts/products without knowing why or for what reason. You may get hit for not tracking the defects.
8.2.4 Monitoring and measuring the product "....verify that product requireemnts have been met.....carried out at appropriate stages of the product realizatio process in accordance with the planned arrangements (see 7.1)." - Of course, we don't know what your planned arrangements are.

But if there is something "hinky" there, the auditor may find some links here for a finding.
For what it's worth, not every "nonconformance" is evaluated by my organization. We have developed a nonconformance guidelines matrix which shows the 'trigger points' for a nonconformance. Depending on which trigger is hit, this will also determine the level of corrective action taken.
If the boxes/parts aren't tagged except when an auditor is around, it does sound as if the "tagging process" isn't working for you. That's okay. Where does it say that tagging must be performed?
7.5.3 Identification and traceability simply requires you to identify the product status. Your boxes could count as this...for example, use visual management to indicate the status of the parts...all parts in red boxes are not to proceed to final inspection, or something to that effect. Of course, from a good business standpoint, you'll want to know why parts have defects. Ties back into 8.4.
Basically, no, I'm not comfortable with how your organization has defined nonconforming product within their processes and I feel that the level of action taken is at a superficial level.
However, my comfort level and feelings (and those of the auditor), are not what determine if you receive a nonconformance.
The auditor may accept your organization's definition, but I predict that you'll receive a nonconformance further within the process on how defective products are treated.