Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent Improper Payments to Estates and Deceased Individuals
Published: 2007-07-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Farmers receive about $20 billion annually in federal farm program payments, which go to individuals and "entities," including corporations, partnerships, and estates. Under certain conditions, estates may receive payments for the first 2 years after an individual's death. For later years, the U.S. Department of Agriculture (USDA) must determine that the estate is not being kept open for payments. As requested, GAO evaluated the extent to which USDA (1) follows its regulations that are intended to provide reasonable assurance that farm program payments go only to eligible estates and (2) makes improper payments to deceased individuals. GAO reviewed a nonrandom sample of estates based, in part, on the amount of payments an estate received and compared USDA's databases that identify payment recipients with individuals the Social Security Administration listed as deceased.
section_title: What GAO Found
paragraphs: USDA has made farm payments to estates more than 2 years after recipients died, without determining, as its regulations require, whether the estates were kept open to receive these payments. As a result, USDA cannot be assured that farm payments are not going to estates kept open primarily to obtain these payments. From 1999 through 2005, USDA did not conduct any eligibility determinations for 73, or 40 percent, of the 181 estates GAO reviewed. Sixteen of these 73 estates had each received more than $200,000 in farm payments, and 4 had each received more than $500,000. Also, for the 108 reviews USDA did conduct, GAO identified shortcomings. For example, from 1999 through 2005, 69 of the 108 estates did not receive annual reviews for every year of payments received, and some USDA field offices approved groups of estates for payments without reviewing each estate. Furthermore, 20 estates that USDA approved for payment eligibility had no documented explanation for keeping the estate open. USDA cannot be assured that millions of dollars in farm payments are proper. It does not have management controls to verify that it is not making payments to deceased individuals. For 1999 through 2005, USDA paid $1.1 billion in farm payments in the names of 172,801 deceased individuals (either as an individual recipient or as a member of an entity). Of this total, 40 percent went to those who had been dead for 3 or more years, and 19 percent to those dead for 7 or more years. Most of these payments were made to deceased individuals indirectly (i.e., as members of farming entities). For example, over one-half of the $1.1 billion payments went through entities from 1999 through 2005. In one case, USDA paid a member of an entity--deceased since 1995--over $400,000 in payments for 1999 through 2005. USDA relies on the farming operation's self-certification that the information provided is accurate and that the operation will inform USDA of any changes, such as the death of a member. Such notification would provide USDA with current information to determine the eligibility of the entity to receive the payments. The complex nature of some farming operations--such as entities embedded within other entities--can make it difficult for USDA to avoid making payments to deceased individuals.

section_title: Letter
paragraphs: Farmers receive about $20 billion annually in federal farm program  payments for crop subsidies, conservation practices, and disasters. Such  payments go to 1.7 million recipients, both individuals and “entities,”  including corporations, partnerships, and estates. Individuals may receive  farm program payments indirectly through as many as three entities. The  Agricultural Reconciliation Act of 1987 (1987 Act) limits payments to  individuals and entities that are “actively engaged in farming.” We reported  in 2004 that because the U.S. Department of Agriculture’s (USDA)  regulations ensuring that recipients are actively engaged in farming do not  specify measurable standards, they allow individuals with limited  involvement in farming to qualify for farm program payments. We  recommended that USDA strengthen its regulations for active engagement  in farming. Subsequently, in November 2006, we identified the need for  better oversight of farm program payments. Without better oversight to  ensure that farm program funds are spent as economically, efficiently, and  effectively as possible, we pointed out, USDA has little assurance that  these funds benefit the agricultural sector as intended.
From 1999 through 2005, USDA, through its Farm Service Agency (FSA),  made 124 million payments totaling about $130 billion. Over $200 million  of this amount went to nearly 42,000 estates. Generally, under the 1987  Act, once a person dies, farm program payments may continue to that  person’s estate under certain conditions. However, if no estate is probated,  or once the estate is settled, the deceased person’s heirs must qualify in  their own right in order to receive payments.
USDA regulations covering most farm program payments allow an estate  to receive payments for the first 2 years after the death of the individual if  the estate meets certain eligibility requirements for active engagement in  farming. That is, an estate must contribute (1) capital, land, or equipment  and (2) the personal representative or heirs of the estate must contribute  labor or management to the farming operation. Following the initial 2  years, the estate will continue to be eligible for program payments if it  meets the active engagement in farming requirement and the local field  office determines that the estate is not being kept open primarily to  continue receiving program payments. Estates are commonly kept open  for longer than 2 years because of, among other things, asset distribution  and probate complications, and tax and debt obligations. Under USDA  regulations, for an estate to remain eligible for farm program payments,  FSA must annually determine that the estate is still active and that  obtaining farm program payments is not the primary reason it remains  open. FSA guidelines provide that each estate should provide documents  showing why it has not distributed its assets to its beneficiaries and why it  is still active for the current year. When property is completely distributed  from the deceased individual to his or her heirs directly or through an  estate, the payments to the individual who died must end. However, the  deceased individual’s heirs may subsequently apply for program payments  in their own right and to receive payments must satisfy the requirements  for active engagement in farming.
FSA guidance directs county committee staff to annually notify individuals  and entities that they must file farm operating plans with their local field  office if they are seeking farm program payments. These plans document  the name of each recipient, the contribution each recipient makes to the  farming operation, and the share of profits and losses each recipient will  receive. The individual filing this plan certifies that, in a timely manner, he  or she will notify the local field office of any changes in the information  that could affect an eligibility determination, such as the death of an  individual in the farming operation. If timely notification is not given, the  farming operation is subject to forfeiture of payments. Also, payments  must be returned if they were based on erroneous information or if the  producer is otherwise not entitled to them.
You asked us to examine FSA’s implementation of regulations to identify  improper payments to estates and deceased individuals. As agreed with  your office, we evaluated the extent to which FSA (1) follows its  regulations that are intended to provide reasonable assurance that farm  program payments go only to eligible estates and (2) makes improper  payments to deceased individuals.
To address these issues, we reviewed USDA’s regulations, FSA’s  guidelines, and other management controls for implementing the  provisions of the 1987 Act. We also spoke with FSA officials in  headquarters, state offices, and local field offices who are responsible for  ensuring that (1) estates are properly reviewed for eligibility and (2)  payments are not made to deceased individuals. To evaluate FSA’s  application of regulations and guidance and to assess the overall  effectiveness of its review process for deciding whether estates are eligible  to receive farm program payments, we reviewed a nonrandom sample of  estate eligibility determinations. To identify estates for our nonrandom  sample, we obtained and analyzed FSA’s computer databases for  information on payment recipients from 1999 through 2005. The databases  contained detailed information on payment recipients—including Social  Security numbers, payment amounts, the status of recipients as individuals  or members of entities, recipients’ ownership interests in entities, types of  entities receiving payments, and additional organizational details. The data  showed 2,841 estates that had received payments for more than 2 years  between 1999 and 2005, thus requiring FSA to conduct a determination of  eligibility. Of these, we examined 181 estates in 26 states and 142 counties.  These estates included the 162 (i.e., 162 of 2,841) that received over  $100,000 in farm program payments from 1999 through 2005. They also  included the 16 estates (i.e., 16 of 2,841) that (1) had received between  $50,000 and $100,000 in farm program payments during this period and (2)  had at least one member receiving payments through three other entities.  Lastly, they included the three estates (i.e., 3 of 2,841) that had at least one  member who appeared to be receiving payments through seven or more  other entities. For each estate selected, we obtained files from FSA field  offices. These files ideally would have included the following information  to facilitate FSA’s determinations: letters testamentary from a probate  court, minutes of the FSA county committee meeting that approved  eligibility, explanation letters or documentation for the reason the estate  remained active beyond 2 years, farm operating plans, and payment  history. However, because the documentation required for probated  estates varies by jurisdiction, we could not easily determine whether  improper payments had been made to estates. Furthermore, even in cases  in which FSA had not done the required annual determinations, or when  relevant documentation was missing or incomplete in the estate file, we  could not determine whether improper payments were made without  examining each case in depth.
In examining the extent to which FSA makes improper payments to  deceased individuals after the date of their death, we matched the  payment recipients in FSA’s databases with individuals that the Social  Security Administration has identified as deceased in its Death Master  File. The data match showed the number and dollar amount of payments  FSA provided to deceased individuals, either directly or indirectly through  entities, from 1999 through 2005. We attributed payments made indirectly  to individuals based on each individual’s ownership share in the entity.
We conducted our review from June 2006 through May 2007 in accordance  with generally accepted government auditing standards, which included an  assessment of data reliability and internal controls. Appendix I contains  more detailed information on our scope and methodology.
subsections: section_title: Background
paragraphs: FSA provides benefits through various programs of the Farm Security and  Rural Investment Act of 2002. Appendix III provides a listing of USDA  farm programs and payments made from 1999 through 2005. The three- entity rule applies to certain USDA payments, including direct and  counter-cyclical payments; loan deficiency payments and marketing loan  gains, under the Marketing Assistance Loan Program; and Conservation  Reserve Program payments.
Direct and Counter-Cyclical Payments Program provides two types of  payments to producers of covered commodity crops, including corn,  cotton, rice, soybeans, and wheat. Direct payments (formerly known as  production flexibility contract payments) are tied to a fixed payment rate  for each commodity crop and do not depend on current production or  current market prices. Instead, direct payments are based on the farm’s  historical acreage and yields. Counter-cyclical payments provide price- dependent benefits for covered commodities whenever the effective price  for the commodity is less than a pre-determined price (called the target  price). Counter-cyclical payments are based on a farm’s historical acreage  and yields, and are not tied to the current production of the covered  commodity.
Marketing Assistance Loan Program (formerly known as the  Commodity Loan Program) provides benefits to producers of covered  commodity crops when market prices are low. Specifically, the federal  government accepts harvested crops as collateral for interest-bearing  loans (marketing assistance loans) that are due in 9 months. When market  prices drop below the loan rate (the loan price per pound or bushel), the  government allows farmers to repay the loan at a lower rate and retain  ownership of their commodity for eventual sale. The difference between  the loan rate and the lower repayment rate is called the marketing  assistance loan gain. In lieu of repaying the loan, farmers may forfeit their  crops to the government when the loan matures and keep the loan  principal. In addition, farmers who do not have marketing assistance loans  can receive a benefit when prices are low—the loan deficiency payment— that is equal to the marketing assistance loan gain that the farmer would  have received if the farmer had a loan. Finally, farmers can purchase  commodity certificates that allow them to redeem their marketing  assistance loan at a lower repayment rate and immediately reclaim their  commodities under loan. The difference between the loan rate and the  lower repayment rate is called the commodity certificate gain.
Conservation Reserve Program provides annual rental payments and cost- share assistance to producers to help them safeguard environmentally  sensitive land. Producers must contractually agree to retire their land from  agricultural purposes and keep it in approved conserving uses for 10 to 15  years.
Most farmers receive farm program payments directly from FSA as an  individual operator. However, some farmers use legal entities to organize  their farming operations to reduce their exposure to financial liabilities or  estate taxes or, in some cases, to increase their potential for farm benefits.
Some of the more common ways farmers organize their operations include  the following:    Corporations have a separate legal existence from their owners; that is,  the corporation, rather than the owners, is ordinarily responsible for farm  business debts and can be sued. As a result, some individuals may  incorporate their farm to protect their personal assets.
General partnerships are a simple arrangement of two or more partners— individuals or entities—that do business together. Partners are personally  liable for their own conduct and for the conduct of those under their direct  supervision, as well as for negligence, wrongful acts, and misconduct of  other partners and partnership employees. Partners are also personally  liable for the partnership’s commercial obligations, such as loans or taxes.
Joint ventures are two or more individuals who pool resources and share  profits or losses. Joint ventures have no legal existence independent of  their owners. Members in a joint venture are personally liable for the  farm’s debts.
Limited partnerships are an arrangement of two or more partners whose  liability for partnership financial obligations is only as great as the amount  of their investment. A limited partnership must have at least one general  partner who manages the farm business and who is fully liable for  partnership financial obligations to be considered eligible for farm  program payments.
Trusts (irrevocable and revocable) are arrangements generally used in  estate planning that provide for the management and distribution of  property. A revocable trust is amendable by the grantor during his or her  lifetime who may also be the trustee and beneficiary. An irrevocable trust  is an arrangement in which the grantor departs with ownership and  control of property.
Other types of entities that may qualify for farm program payments under  payment limitation rules include a limited liability company—a hybrid  form of a business entity with the limited liability feature of a corporation  and the income tax treatment of a general partnership; a charitable  organization; and a state or political subdivision.
FSA is responsible for ensuring that recipients meet payment eligibility  criteria and do not receive payments that exceed the established  limitations. It carries out this responsibility through its headquarters  office, 50 state offices, and over 2,300 field offices.
IPIA requires the heads of federal agencies to annually review all programs  and activities that they administer, identify those that may be susceptible  to significant improper payments, and estimate and report on the annual  amount of improper payments in those programs and activities. IPIA  defines an improper payment as any payment that should not have been  made or that was made in an incorrect amount, including any payment to  an ineligible recipient.
OMB defines significant improper payments as payments in any particular  program that exceed both 2.5 percent of total program payments and $10  million annually. If a program’s estimated improper payments exceed $10  million in a year, IPIA and related OMB guidance requires agencies to  prepare and implement a plan to reduce improper payments and report  actions taken. Agencies are required to report this information, among  other things, annually in their Performance and Accountability Reports.  Specifically, OMB guidance requires agencies to report on (1) the causes  of improper payments and corrective actions, (2) the steps the agency has  undertaken to ensure that agency managers are held accountable for  reducing and recovering erroneous payments, along with a realistic  timetable, and (3) any statutory or regulatory barriers that may limit the  agency’s corrective actions in reducing improper payments. In November  2006, we reported that federal agencies, including USDA, need to improve  their reporting of improper payments under IPIA by better identifying  programs susceptible to improper payments and improving statistical  sampling methodologies to estimate improper payments made.
section_title: Because Many FSA Field Offices Do Not Systematically Determine the Eligibility of Estates for Farm Program Payments, FSA Cannot Be Assured That Payments Are Proper
paragraphs: While there are legitimate reasons for keeping estates open, we found that  FSA field offices do not systematically determine the eligibility of all  estates that have been kept open for more than 2 years, as regulations  require, and when they do conduct eligibility determinations, the quality of  the determinations varies. Without performing annual determinations, an  essential management control, FSA cannot identify estates being kept  open primarily for the purpose of receiving these payments and be assured  that the payments are proper.
We identified weaknesses in FSA’s eligibility determinations for 142 of the  181 estates we reviewed. In particular, FSA did not conduct any program  eligibility determinations for 73, or 40 percent, of estates that required a  determination from 1999 through 2005. Because FSA did not conduct the  required determinations, the extent to which estates remained open for  reasons other than for obtaining program payments is not known. Sixteen  of these 73 estates received more than $200,000 in farm program payments  and 4 received more than $500,000 during this period. In addition, 22 of the  73 estates had received no eligibility determinations during the 7-year  period we reviewed, and these estates had been open and receiving  payments for more than 10 years. In one case, we found that the estate has  been open since 1973. The following provides examples of estates that  received farm program payments but were not reviewed for eligibility by  FSA:    A North Dakota estate received farm program payments totaling $741,000  from 1999 through 2003, but FSA did not conduct the required  determinations.
An Alabama estate received payments totaling $567,000 from 1999 through  2005, but FSA did not conduct the required determinations. In this case,  the estate has been open since 1981.
Two estates in Georgia, open since 1989 and 1996, respectively, received  payments totaling more than $330,000 each, from 1999 through 2005.  Neither estate received the required determinations for any of the years  we reviewed.
An estate in New Mexico, open since 1991, received $320,000 from 1999  through 2005, but it did not receive any of the required determinations.
According to FSA field officials, many determinations were either not  done or not done thoroughly, in part because of a lack of sufficient  personnel and time, as well as competing priorities for carrying out farm  programs. However, FSA’s failure to conduct appropriate eligibility  determinations means that it has no assurance that it is not making farm  program payments to estates that have been kept open primarily to receive  these payments.
Even when FSA field offices determined estates’ eligibility for continued  farm program payments, they did not always do so consistently. For the  remaining 108 estates, 39 had eligibility determinations every year that a  determination was required, while 69 had determinations at least once  between 1999 and 2005, but not with the frequency required by  regulations. Table 1 shows the number of years for which estates in our  sample were required to have annual eligibility determinations compared  with the number of years that FSA actually conducted determinations. The  dark shaded numbers highlight the number of estates that received all the  required annual eligibility determinations for the years that the estate  received farm program payments—a total of 39 estates.
As the table shows, the longer an estate was kept open, the fewer  determinations it received. For example, only 2 of the 36 estates requiring  a determination every year over the 7-year period received all seven  required determinations.
According to FSA guidelines, an estate should provide evidence that it is  still making required reports to the court to be eligible for farm program  payments. However, we found that FSA sometimes approved eligibility for  payments when the estate had provided insufficient information—that is,  information that was either nonexistent or vague. For example, in 20 of  the 108 determinations, the minutes of FSA county committee meetings  indicated approval of eligibility for payments to estates, but the associated  files did not contain any documents that explained why the estate  remained active. FSA also approved eligibility on the basis of insufficient  explanations for keeping the estate open. In five cases, executors  explained that they did not want to close the estate but did not explain  why. In a sixth case, documentation stated that the estate was remaining  active upon the advice of its lawyers and accountants, but did not explain  why.
Furthermore, some FSA field offices approved program payments to  groups of estates that were kept open after 2 years without any apparent  review. In one case in Georgia, minutes of an FSA county committee  meeting listed 107 estates as eligible for payments by stating that the  county committee approved all estates open over 2 years. Two of the  estates on this list of 107 were part of the sample that we reviewed in  detail. In addition, another 10 estates in our sample, from nine different  FSA field offices, were also approved for payments without any indication  that even a cursory review had been conducted.
Additionally, the extent to which FSA field offices make eligibility  determinations varies from state to state, which suggests that FSA is not  consistently implementing its eligibility rules. Overall, FSA field offices in  16 of the 26 states we reviewed made less than one-half of the required  determinations of their estates. For example, in Alabama and in Georgia,  FSA field offices made only 22 percent and 31 percent of the required  determinations for estates, respectively, compared with FSA field offices  in Kansas and Texas, which made 62 percent and 87 percent of the  required determinations, respectively. Table 2 shows, for the 181 estates in  our sample, the variation in FSA’s conduct of eligibility reviews from 1999  through 2005 in states that had five or more estates to examine. Appendix  IV shows the extent to which FSA conducted estate eligibility  determinations in each state in our review.
Under the three-entity rule, individuals receiving program payments may  not hold a substantial beneficial interest in more than two entities also  receiving payments. However, because a beneficiary of an Arkansas estate  we reviewed received farm program payments through the estate in 2005,  as well as through three other entities, the beneficiary was able to receive  payments beyond what the three-entity rule would have allowed. FSA was  unaware of this situation until we brought it to officials’ attention, and FSA  has begun taking steps to recover any improper payments. Had FSA  conducted any eligibility determinations for this estate during the period,  it might have determined that the estate was not eligible for these  payments, preventing the beneficiary from receiving what amounted to a  payment through a fourth entity.
We informed FSA of the problems we uncovered during the course of our  review. According to FSA field officials, a lack of sufficient personnel and  time, and competing priorities for carrying out farm programs explain, in  part, why many determinations were either not conducted or not  conducted thoroughly. Nevertheless, officials told us that they would  investigate these cases for potential receipt of improper payments and  would start collection proceedings if they found improper payments.
section_title: Because FSA Does Not Have Appropriate Management Controls, It Cannot Be Assured That It Is Not Making Payments to Deceased Individuals
paragraphs: FSA cannot be assured that millions of dollars in farm program payments  it made to thousands of deceased individuals from fiscal years 1999  through 2005 were proper because FSA does not have appropriate  management controls, such as computer matching, to verify that it is not  making payments to deceased individuals. For example, FSA is not  matching recipients listed in its payment database with individuals listed  as deceased in the Social Security Administration’s Death Master File. In  addition, complex farming operations, such as corporations or general  partnerships with embedded entities, make it difficult for FSA to prevent  improper payments to deceased individuals. At present, FSA relies on  farming operations to advise the agency of any change in the operation,  including the death of a member that would affect payments made to the  operation.
subsections: section_title: FSA Made Millions of Dollars of Farm Program Payments to Deceased Individuals from Fiscal Years 1999 through 2005
paragraphs: From fiscal years 1999 through 2005, FSA paid $1.1 billion in farm program  payments to 172,801 deceased individuals—either as individuals or as  members of entities, according to our matching of FSA’s payment  databases with the Social Security Administration’s Death Master File. Of  the $1.1 billion in farm payments, 40 percent went to individuals who had  been dead for 3 or more years, and 19 percent went to individuals who had  been dead for 7 or more years. Figure 1 shows the number of years in  which FSA made farm program payments after an individual had died and  the value of those payments. As the figure shows, for example, FSA  provided $210 million in farm program payments to deceased individuals 7  or more years after their date of death.
Three cases illustrate how FSA’s lack of management controls can result  in improper payments to deceased individuals. In the first case, FSA  provided more than $400,000 in farm program payments from 1999  through 2005 to an Illinois farming operation on the basis of the ownership  interest of an individual who had died in 1995. According to FSA’s  records, the farming operation consisted of about 1,900 cropland acres  producing mostly corn and soybeans. It was organized as a corporation  with four shareholders, with the deceased individual owning a   40.3-percent interest in the entity. Nonetheless, we found that the  deceased individual had resided in Florida. Another member of this  farming operation, who resided in Illinois and had signature authority for  the operation, updated the operating plan most recently in 2004 but failed  to notify FSA of the individual’s death. The farming operation therefore  continued to qualify for farm program payments on behalf of the deceased  individual. As noted earlier, FSA requires farming operations to certify that  they will notify FSA of any change in their operation and to provide true  and correct information. According to USDA regulations, failure to do so  may result in forfeiture of payments and an assessment of a penalty. FSA  recognized this problem in December 2006 when the children of the  deceased individual contacted the FSA field office to obtain signature  authority for the operation. FSA has begun proceedings to collect the  improper payments.
In the second case, FSA provided more than $200,000 in farm program  payments from 1999 through 2002 to an Indiana farming operation on the  basis of the ownership interest of an individual who had died in 1993.  According to FSA’s records, the farming operation was a corporation, and  the deceased individual held 100-percent ownership interest in the entity.  The corporation operated farms in two counties, but upon the death of the  individual, the corporation failed to notify the FSA field office in either  county of the death. The corporation therefore continued to receive farm  program payments on behalf of the deceased individual until 2002, when it  filed a new farm operating plan with FSA that no longer included the  deceased individual as a member. When we brought this case to the  attention of FSA officials, they were unaware that the individual had died  in 1993 and acknowledged that FSA provided improper payments to the  farming operation from 1993 through 2002. According to agency officials,  they intend to take action against the farming operation to recover the  improper payments.
In the third case, FSA provided about $260,000 in farm program payments  from 1999 through 2006 to a corporation on the basis of the ownership  interest of an individual who had died in 1993. According to FSA records,  the farming operation had 14 shareholders, with the deceased individual  holding a 14-percent interest. We found that another member of this  farming operation, who had signature authority for the operation, updated  the farm’s operating plan in 2004 but failed to notify FSA of the death of  this member who we found had resided in a metropolitan area several  hundred miles from the farm. The farming operation therefore continued  to receive farm program payments on behalf of the deceased individual.  FSA was unaware that the individual had died in 1993, but said it would  investigate and if improper payments were made it would take action  against the farming operation to recover the payments.
USDA recognizes that its farm programs have management control  weaknesses, making them vulnerable to significant improper payments. In  its FY 2006 Performance and Accountability Report to OMB, USDA  reported that poor management controls led to improper payments to  some farmers, in part because of incorrect or missing paperwork. In  addition, as part of its reporting of improper payments information, USDA  identified six FSA programs susceptible to significant risk of improper  payments with estimated improper payments totaling over $2.8 billion in  fiscal year 2006, as shown in table 3.
section_title: Complex Farming Operations and a Lack of Management Controls Raise the Potential for Improper Payments to Deceased Individuals
paragraphs: Farm program payments made to deceased individuals indirectly—that is,  as members of farming entities—represent a disproportionately high share  of post-death payments. Specifically, payments to deceased individuals  through entities accounted for $648 million—or 58 percent of the $1.1  billion in payments made to all deceased individuals from 1999 through  2005. However, payments to individuals through entities accounted for  $35.6 billion—or 27 percent of the $130 billion in farm program payments  FSA provided from 1999 through 2005. Similarly, we identified 39,834 of  the 172,801 deceased individuals as receiving farm program payments  through entities when we compared FSA’s databases with the Social  Security Administration’s Death Master File.
The complex nature of some types of farming entities, in particular,  corporations and general partnerships, increases the potential for  improper payments. For example, a significant portion of farm program  payments went to deceased individuals who were members of  corporations and general partnerships. Deceased individuals identified as  members of corporations and general partnerships received nearly three- quarters of the $648 million that went to deceased individuals in all  entities. The remaining one-quarter of payments went to deceased  individuals of other types of entities, including estates, joint ventures,  limited partnerships, and trusts. With regard to the number of deceased  individuals who received farm program payments through entities, they  were most often members of corporations and general partnerships.  Specifically, of the 39,834 deceased individuals who received farm  program payments through entities, about 57 percent were listed in FSA’s  databases as members of corporations or general partnerships. Table 4  shows the number and percent of farm program payments FSA made to  deceased individuals through entities from 1999 through 2005.
As we reported in 2004, some farming operations may reorganize to  overcome payment limits to maximize their program benefits. Large  farming operations are often structured as corporations or general  partnerships with other entities embedded within these entities. Deceased  individuals are sometimes members of these embedded entities. For  example, as shown in table 4, 8,575 deceased individuals received  payments through general partnerships from 1999 through 2005. Of these,  687 received farm program payments because they were members of one  or more entities that were embedded in the general partnership. Generally,  these partnerships are consistent with the 1987 Act, as amended, whereby  an individual can qualify for up to three payments by being a member of  three entities within one general partnership. Furthermore, of the 172,801  deceased individuals identified as receiving farm program payments, 5,081  received more than one payment because (1) they were a member of more  than one entity, or (2) they received payments as an individual and were a  member of an entity.
According to FSA field officials, complex farming operations, such as  corporations and general partnerships with embedded entities, make it  difficult for FSA to prevent making improper payments to deceased  individuals. In particular, in many large farming operations, one individual  often holds signature authority for the entire farming operation, which  may include multiple members or entities. This individual may be the only  contact FSA has with the operation; therefore, FSA cannot always know  that each member of the operation is represented accurately to FSA by the  signing individual for several reasons. First, it relies on the farming  operation to self-certify that the information provided is accurate and that  the operation will inform FSA of any operating plan changes, which would  include the death of an operation’s member. Such notification would  provide USDA with current information to determine the eligibility of the  entity to receive the payments. Second, FSA has no management controls,  such as computer matching of its payment files with the Social Security  Administration’s Death Master File, to verify that an ongoing farming  operation has failed to report the death of a member.
section_title: Conclusions
paragraphs: FSA has a formidable task—ensuring that billions of dollars in program  payments are made only to estates and individuals that are eligible to  receive them. Our review, however, demonstrates that FSA field offices do  not always conduct the necessary annual determinations to ensure that  estates are eligible to receive farm program payments. FSA’s performance  of these determinations for estates that have been kept open for more than  2 years could serve as an effective deterrent to making improper program  payments. However, these determinations can only be a deterrent if they  are consistently and thoroughly conducted. As we have found, some FSA  field offices have failed to conduct eligibility determinations or have not  conducted them consistently and documented the results of their  determinations.
FSA has relied on farming operations to report the death of a member  whose ownership interest makes the operation eligible for program  payments. However, it appears that some individuals who certify program  eligibility forms for farming operations are either not taking seriously their  obligation to notify FSA of the death of a member of the operation or are  deliberately withholding this information to maximize their receipt of farm  program payments. Our matching of FSA’s farm payment database with  the Social Security Administration’s Death Master File indicates that FSA’s  reliance is misplaced, in at least some instances. We previously reported  that we found examples of farming operations where recipients may  circumvent the payment limits by organizing large farming operations to  maximize program payments. The complex nature of these entities—such  as entities embedded within other entities—increases the potential that  deceased individuals will receive farm program payments because the  status of these individuals is not easy for FSA to ascertain. Currently, FSA  does not have effective management controls to verify that an individual  receiving farm program payments, either directly or indirectly through an  entity, is still alive. The lack of these controls increases the risk of  improper payments being made over time.
The shortcomings we have identified underscore the need for improved  oversight of federal farm programs. Such oversight can help to ensure that  program funds are spent as economically, efficiently, and effectively as  possible, and that they benefit those engaged in farming as intended.
section_title: Recommendations for Executive Action
paragraphs: To provide reasonable assurance that FSA does not make improper  payments to estates and deceased individuals, we recommend that the  Secretary of Agriculture direct the Administrator of the Farm Service  Agency to  instruct FSA field offices to conduct all annual estate eligibility  determinations as required; implement management controls, such as matching payment files with  the Social Security Administration’s Death Master File, to verify that an  individual receiving farm program payments has not died; and   determine if improper program payments have been made to deceased  individuals or to entities that failed to disclose the death of a member,  and if so, recover the appropriate amounts.
In addition, we have referred the cases we identify in this report to USDA’s  Office of Inspector General for further investigation.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided FSA with a draft of this report for review and comment. FSA  agreed with our recommendations and already has begun to take action to  implement them. For example, FSA has issued a notice (Notice PL-158,  May 31, 2007) to its field offices emphasizing the current payment  eligibility rules, procedures, and review requirements for payments with  respect to deceased individuals and estates. This directive instructs these  offices to review the eligibility of all estates that have been open for more  than 2 years and requested 2007 farm program benefits. Furthermore,  according to FSA, it is currently working with the Social Security  Administration to obtain access to the Death Master File of deceased  individuals. FSA intends to develop a process for matching its payment  data against the Death Master File on at least an annual basis. According  to FSA, it will then have a reliable means for identifying deceased  individuals who may also be payment recipients. In addition, once  implemented, FSA will no longer have to depend on the farming operation  to notify the agency of an individual’s death.
Despite its concurrence with our recommendations, FSA did not agree  with our use of the term “improper payments” in this report. FSA  suggested that we revise the report to refer to the payments as at most  “questionable” in view of current eligibility regulations, rather than  improper. Specifically, the agency stated that the payments we describe do  not meet the definition of improper payments under IPIA. We disagree. We  believe three cases we highlight in examples in the report do meet the  definition of improper payments under IPIA. IPIA defines improper  payments as any payment that should not have been made or that was  made in an incorrect amount (including overpayments and  underpayments) under statutory, contractual, administrative, or other  legally applicable requirements. This definition would include any  payment made to an ineligible recipient either directly or through an  entity. Our examples are consistent with this definition. Furthermore,  officials in FSA’s field offices agreed with our findings and told us they  intend to recover the payments. For the remaining farm program payments  identified in the report, we continue to believe that the potential exists for  improper payments because of the lack of FSA management controls and  the complexity of some of the farming operations involved. Under current  circumstances, FSA cannot be assured that millions of dollars in farm  program payments are going to those who met eligibility requirements and  thus should have received these payments.
FSA’s written comments are presented in appendix II. FSA also provided  us with suggested technical corrections, which we have incorporated into  this report, as appropriate.
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If you or your staff have any questions about this report, please contact me  at (202) 512-3841 or shamesl@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: At the request of the Ranking Member of the Senate Committee on  Finance, we reviewed the Farm Service Agency’s (FSA) implementation of  payment eligibility provisions to identify improper payments to estates and  deceased individuals. Specifically, we evaluated the extent to which FSA  (1) follows its regulations that are intended to provide reasonable  assurance that farm program payments go only to eligible estates and (2)  makes improper payments to deceased individuals.
To determine how well FSA field offices carry out rules that prohibit  payments to ineligible recipients, we reviewed guidance that FSA field  offices use to determine farm program payment eligibility, including  relevant statutes and regulations and agency policy, including the FSA  Handbook on Payment Limitations, 1-PL (Revision 1). We reviewed  relevant studies prepared by the U.S. Department of Agriculture’s (USDA)  Office of Inspector General and the Congressional Research Service, as  well as our own past reports. We also reviewed USDA’s FY 2006  Performance and Accountability Report to understand its assessment of  internal controls for its farm programs. In addition, we spoke with FSA  officials in headquarters, state offices, and local field offices who are  responsible for ensuring that (1) estates are properly reviewed for  eligibility and (2) payments are not made to deceased individuals.
We obtained and analyzed FSA’s computer databases for information on  payment recipients from 1999 through 2005. These databases included  FSA’s Producer Payment Reporting System, Commodity Certificate file,  and Permitted Entity file. The databases contain detailed information on  payment recipients: Social Security numbers, payment amounts, the status  of recipients as individuals or members of entities, their ownership  interest in entities, types of entity, and additional organizational details.  The databases also contain information on payments made under USDA’s  farm programs, including the Direct and Counter-Cyclical Payments  Program, Marketing Assistance Loan Program, Conservation Reserve  Program, and Environmental Quality Incentives Program. We also  compiled data on farm program benefits provided through cooperative  marketing associations. Because our analysis covered the years 1999  through 2005, it also included farm payments from programs authorized  before the Farm Security and Rural Investment Act of 2002, such as  production flexibility contract payments authorized under the Agriculture  Market Transition Act and market loss assistance payments and crop  disaster assistance payments authorized under various ad hoc legislation.  Appendix III provides a list of USDA farm programs we reviewed.
To evaluate FSA’s application of regulations and guidance to assess the  overall effectiveness of its review process for deciding whether estates are  eligible to receive farm program payments, we reviewed a nonrandom  sample of estate eligibility determinations. To identify estates for our  review, we analyzed FSA’s databases. The data showed that 2,841 estates  had received payments for more than 2 years between 1999 and 2005, thus  requiring FSA to conduct a determination of eligibility. Of these, we  examined 181 estates in 26 states and 142 counties. These estates included  the 162 (i.e., 162 of 2,841) that received over $100,000 in farm program  payments during this period. We also selected the 16 estates (i.e., 16 of  2,841) that (1) had received between $50,000 and $100,000 in farm program  payments during this period and (2) had at least one member receiving  payments through three other entities, which could indicate circumvention  of the three-entity rule. Lastly, we selected the three estates (i.e., 3 of  2,841) that had at least one member receiving payments through seven or  more other entities.
For each estate selected, we reviewed case file documents to verify the  basis for FSA field offices’ decisions to grant eligibility. Specifically, we  obtained and reviewed files from FSA field offices that ideally would have  included the following information to facilitate FSA’s determinations:  letters testamentary from a probate court, minutes of the FSA county  committee meeting that approved eligibility, explanation letters or  documentation for the reason the estate remained active beyond 2 years,  farm operating plans, and payment history. States and counties vary  widely in the amount and type of documentation they require for probated  estates. Consequently, we could not easily determine whether improper  payments were made to estates. Furthermore, even in cases in which FSA  had not done the required annual determinations, or when relevant  documentation was missing or incomplete in the estate file, we could not  determine whether improper payments were made without examining  each case in depth.
To evaluate the extent to which FSA makes improper payments to  deceased individuals, we compared recipients of farm program payments  in FSA’s computer databases with individuals whose Social Security  numbers were listed in the Social Security Administration’s Death Master  File, to identify post-death program payments for individuals who were  deceased. The Death Master File contains information such as the name  and Social Security numbers of deceased individuals in the United States.  We assessed the reliability of FSA’s data by (1) performing electronic  testing of required data elements, (2) reviewing existing information about  the data and the system that produced them, and (3) interviewing agency  officials knowledgeable about the data. We determined that the data were  sufficiently reliable for the purposes of our review. Although we did not  assess the reliability of the Social Security Administration’s Death Master  File, it is the most comprehensive list of death information available in the  federal government and is generally used by other government agencies  and researchers.
Using FSA’s databases, we identified the 2.9 million individuals who  received payments, either directly or indirectly through an entity, from  1999 through 2005. Payments were attributed to members of an entity by  apportioning the payments according to each member’s percentage share  of that entity. Using these Social Security numbers, we then compared  these individuals with individuals listed in the Social Security  Administration’s Death Master File to determine the extent to which  deceased individuals may have received improper payments. The data  match showed the number and dollar amount of payments FSA provided  to deceased individuals from 1999 through 2005. To gain an understanding  of circumstances behind seemingly improper payments, we obtained  relevant documents from FSA, including farm operating plans and acreage  reports, for selected cases.
We conducted our review between June 2006 and May 2007 in accordance  with generally accepted government auditing standards.
section_title: Appendix II: Comments from the U.S. Department of Agriculture
subsections: section_title: GAO’s Comments
paragraphs: 1.  We believe the payments we highlight in three examples in the report  meet the definition of improper payments under IPIA. IPIA defines  improper payments as any payment that should not have been made or  that was made in an incorrect amount (including overpayments and  underpayments) under statutory, contractual, administrative, or other  legally applicable requirements. This definition would include any  payment made to an ineligible recipient either directly or through an  entity. Our examples are consistent with this definition. Furthermore,  officials in FSA’s field offices agreed with our findings and told us they  intend to recover the payments. For the remaining farm program  payments identified in the report, we continue to believe that the  potential exists for improper payments because of the lack of FSA  management controls and the complexity of some of the farming  operations involved. Under current circumstances, FSA cannot be  assured that millions of dollars in farm program payments are going to  those who met eligibility requirements and thus should have received  these payments.   2.  For each of the three examples discussed in the report, we verified the  accuracy of information in FSA’s payment system and discussed the  estate with the FSA field office where the estate was located. Because  the field offices have this information, we do not understand why FSA  does not believe the report provided sufficient information to  investigate these cases further.    3.  We would expect FSA field offices to have appropriate documents to  verify acceptable reasons for keeping the estate open. These files  could have included the following information to facilitate FSA’s  determinations:  letters testamentary from a probate court, minutes of  the FSA county committee meeting that approved eligibility,  explanation letters or documentation for the reason the estate  remained active beyond 2 years, and farm operating plans. However,  when annual determinations were not done or relevant documentation  was missing or incomplete in the files, we could not determine with  certainty whether improper payments were made to estates. As we  discuss on page 4 of this report, the wide variation in state and county  documentation required for probated estates made it difficult for us to  make eligibility determinations. We continue to believe that the failure  of FSA’s field offices to conduct annual determinations of eligibility  increases the risk of improper payments being made over time.  4.  FSA implies that because the $1.1 billion in farm program payments  paid to deceased individuals during 1999 through 2005 amounts to only  8/10 of 1 percent of the total payments made during this period, the  amount is negligible. We disagree—a billion dollars is not a negligible  sum. In addition, this amount represents only payments made to  deceased individuals during this specific period; it does not capture  payments made to deceased individuals before and after this period.  FSA is obligated to ensure that program funds are spent as  economically, efficiently, and effectively as possible. The nation’s  current deficit and growing long-term fiscal challenges reinforce the  importance of this obligation. Implementing management controls,  such as matching payment files with the Social Security  Administration’s Death Master File, to verify that an individual  receiving farm program payments has not died is a simple, cost- effective means to achieve this end.   5.  FSA is correct that counter-cyclical payments may be made for up to 3  years after an individual has died. However, according to our analysis,  only $46.5 million (4.2 percent) of the $1.1 billion in payments made to  deceased individuals from 1999 through 2005 were counter-cyclical  payments made for the same program year as the year in which the  individual died. Furthermore, a farming operation is subject to  forfeiture of payments, including counter-cyclical payments, if it has  not notified FSA of a change in the farming operation, such as the  death of an individual who receives payments as a member of that  operation. Many deceased individuals who received counter-cyclical  payments during this period also received payments under other  programs for which FSA should have been notified of the change in the  farming operation. However, the fact that an individual was identified  as deceased in our computer matching indicates FSA was not informed  that a change in the farm operation had occurred, suggesting that the  farming operation was not eligible to receive any of the payments,  including the counter-cyclical payments.   6.  As noted in the report, the source for information in table 3 (p. 17) is  USDA’s FY 2006 Performance and Accountability Report. The  improper payments and the percent error rate for each program in  table 3 are USDA’s estimates. We acknowledge that improper  payments made under the Noninsured Assistance Program are not  exclusively the result of payments made to deceased individuals.
section_title: Appendix III: U.S. Department of Agriculture Farm Program Payments, Fiscal Years 1999 through 2005
subsections: section_title: Karnal bunt fungus compensation payments
paragraphs: Lamb Meat Adjustment Assistance Program  $(20,257) $(22,175) $(777) (33,187) (467,556) (108,096) (470,359) (779,398) (755,675) (20,557) (2,905)
Soil and Water Agricultural Assistance Program  Trade Adjustment Assistance for Farmers  Wool & Mohair Market Loss Assistance Program   (4,975) (300) $23,807,786,218 (292,942,256) (8,252,201) (2,005,089)  (1,569) (1,668) (532) (261)  (80) (524) (76,838) (8,136) (1,153)
Includes cotton user marketing certificate gains.
Includes the Apple & Potato Quality Loss Program, Sugar Beet Disaster Program, Quality Loss  Program, Crop Loss Disaster Assistance Program, Florida Nursery Losses Program, Florida  Hurricane Charley Disaster Program, Disaster Reserve Flood Compensation Program, Florida  Hurricane Nursery Disaster Program, Florida Hurricane Vegetable Disaster Program, Multi-Year Crop  Loss Disaster Assistance Program, North Carolina Crop Hurricane Damage Program, Nursery  Losses In Florida Program, and Single Year Crop Loss Disaster Assistance Program, as well as  Disaster Supplemental Appropriation payments, Crop Disaster North Carolina payments, Crop  Disaster Virginia payments, and 1999 Citrus Losses In California.
Includes the Dairy Indemnity Program, Dairy Options Pilot Program, and Dairy Production Disaster  Assistance Program.
Includes the Livestock Assistance Program, Livestock Indemnity Program, Avian Influenza Indemnity  Program, Cattle Feed Program, Pasture Flood Compensation Program, and Pasture Recovery  Program.
Includes “loan deficiency payment-like” grazing payments for wheat, barley, oats, and triticale.
Includes supplemental appropriations for the Noninsured Assistance Program.
Includes supplemental appropriations for the Oilseed Payment Program.
Includes the Sugar Payment-In-Kind Diversion Program.
Includes the Tobacco Loss Assistance Program and the Supplement Tobacco Loss Assistance  Program.
Includes the Yakima Basin Water Program, Flood Compensation Program for Harney County  Oregon, Fresh Market Peaches Program, Idaho Oust Program, Livestock Compensation Program-  Grants For Catfish Producers, Limited California Cooperative Insolvency Program, New Mexico  Tebuthiuron Application Losses Program, New York Onion Producers Program, Potato Diversion  Program, Poultry Enteritis Mortality Syndrome Program, Seed Corn Purchase Containing CRY9C  Protein Program, Specialty Crops-Base State Grants Program, Specialty Crops-Value Of Production  Program, and State Commodity Assistance Program, as well as Consent Decree payments and  Interest Penalty payments.
section_title: Appendix IV: U.S. Department of Agriculture Estate Eligibility Reviews, by State, Program Years 1999 through 2005
paragraphs: Table 5 shows the variation by state in FSA’s conduct of eligibility  determinations from 1999 through 2005 for the 181 estates in our sample.  Not all states are represented because we chose estates based on criteria  other than location. Our sample of 181 estates included the 162 that  received over $100,000 in farm program payments during this period. We  also selected the 16 estates that (1) received between $50,000 and $100,000  in farm program payments during this period and (2) had at least one  member receiving payments through three other entities, which could  indicate circumvention of the three-entity rule. In addition, we selected  the three estates that had at least one member receiving payments through  seven or more other entities.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, James R. Jones, Jr., Assistant  Director; Hamid E. Ali; Kevin S. Bray; Thomas M. Cook; Stephanie K. Fain;  Ronald E. Maxon, Jr.; Jennifer R. Popovic; and Carol Herrnstadt Shulman  made key contributions to this report.
section_title: Related GAO Products
paragraphs: Improper Payments: Agencies’ Efforts to Address Improper Payment and  Recovery Auditing Requirements Continue. GAO-07-635T. Washington,  D.C.: March 29, 2007.
Improper Payments: Incomplete Reporting under the Improper  Payments Information Act Masks the Extent of the Problem.   GAO-07-254T. Washington, D.C.: December 5, 2006.
Improper Payments: Agencies’ Fiscal Year 2005 Reporting under the  Improper Payments Information Act Remains Incomplete. GAO-07-92.  Washington, D.C.: November 14, 2006.
Financial Management: Challenges Continue in Meeting Requirements  of the Improper Payments Information Act. GAO-06-581T. Washington,  D.C.: April 5, 2006.
Financial Management: Challenges Remain in Meeting Requirements of  the Improper Payments Information Act. GAO-06-482T. Washington, D.C.:  March 9, 2006.
Financial Management: Challenges in Meeting Governmentwide  Improper Payment Requirements. GAO-05-907T. Washington, D.C.: July  20, 2005.
Financial Management: Challenges in Meeting Requirements of the  Improper Payments Information Act. GAO-05-605T. Washington, D.C.:  July 12, 2005.
Financial Management: Challenges in Meeting Requirements of the  Improper Payments Information Act. GAO-05-417. Washington, D.C.:  March 31, 2005.
Farm Program Payments: USDA Should Correct Weaknesses in  Regulations and Oversight to Better Ensure Recipients Do Not  Circumvent Payment Limitations. GAO-04-861T. Washington, D.C.: June  16, 2004.
Farm Program Payments: USDA Needs to Strengthen Regulations and  Oversight to Better Ensure Recipients Do Not Circumvent Payment  Limitations. GAO-04-407. Washington, D.C.: April 30, 2004.
Strategies to Manage Improper Payments: Learning From Public and  Private Sector Organizations. GAO-02-69G. Washington, D.C.: October 1,  2001.
Farm Programs: Changes to the Marketing Assistance Loan Program  Have Had Little Impact on Payments. GAO-01-964. Washington, D.C.:  September 28, 2001.
Farm Programs: Information on Recipients of Federal Payments.   GAO-01-606. Washington, D.C.: June 15, 2001.
Financial Management: Billions in Improper Payments Continue to  Require Attention. GAO-01-44. Washington, D.C.: October 27, 2000.