Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent Payments to Individuals Who Exceed Income Eligibility Limits
Published: 2008-10-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Farmers receive about $16 billion annually in federal farm program payments. These payments go to about 2 million recipients, both individuals and entities. GAO previously has reported that the U.S. Department of Agriculture (USDA) did not consistently ensure that these payments went only to those who meet eligibility requirements. GAO was asked to evaluate (1) how effectively USDA implemented 2002 Farm Bill provisions prohibiting payments to individuals or entities whose income exceeded $2.5 million and who derived less than 75 percent of that income from farming, ranching, or forestry operations, (2) the potential impact of the 2008 Farm Bill's income eligibility provisions on individuals who receive farm payments, and (3) the distribution of income of these individuals compared with all 2006 tax filers. GAO compared USDA data on individuals receiving payments with the latest available Internal Revenue Service (IRS) data on these individuals.
section_title: What GAO Found
paragraphs: USDA does not have management controls, such as reviewing an appropriate sample of recipients' tax returns, to verify that payments are made only to individuals who do not exceed income eligibility caps and therefore cannot be assured that millions of dollars in farm program payments it made are proper. GAO found that of the 1.8 million individuals receiving farm payments from 2003 through 2006, 2,702 had an average adjusted gross income (AGI) that exceeded $2.5 million and derived less than 75 percent of their income from farming, ranching, or forestry operations, thereby making them potentially ineligible for farm payments. Nevertheless, USDA paid over $49 million to these individuals. According to USDA officials, a number of factors--such as resource constraints that hamper its ability to examine complex tax and financial information as well as a lack of authority to obtain and use IRS tax filer data for such purposes--contribute to the department's inability to verify that each individual who receives farm program payments complies with income eligibility provisions. However, USDA does not routinely sample individuals receiving farm payments to test for income eligibility; instead, its annual sample selected for review is based primarily on compliance with eligibility requirements other than income. The 2008 Farm Bill directs USDA to use statistical methods to target those individuals most likely to exceed income eligibility caps. The 2008 Farm Bill will increase the number of individuals likely to exceed the income eligibility caps. That is, with lower income eligibility caps under the 2008 Farm Bill, the number of individuals whose AGI exceeds the caps will rise, increasing the risk that USDA will make improper payments to more individuals. For example, had the new Farm Bill been in effect in 2006, as many as 23,506 individuals who received farm program payments would likely have been ineligible for crop subsidy and disaster assistance payments totaling as much as $90 million. Compared with all tax filers, individuals who participated in farm programs in 2006 are more likely to have higher incomes. For example, 12 of every 1,000 individuals receiving farm program payments reported AGI between $500,000 and $1 million compared with about 4 of all tax filers who reported income at this level.

section_title: Letter
paragraphs: Farmers receive about $16 billion annually in federal farm program  payments for crop subsidies, conservation practices, and disasters. These  payments go to about 2 million recipients, both individuals and entities,  including corporations, partnerships, and trusts. As we reported in  November 2006, the U.S. Department of Agriculture (USDA) needed to  better oversee farm program payments. Without better oversight to  ensure that farm program funds are spent as economically, efficiently, and  effectively as possible, we noted, USDA had little assurance that these  funds benefit the agricultural sector as intended. We also previously  reported that because of weak management controls at USDA, some  payments, potentially totaling millions of dollars, have gone to deceased  individuals or farming entities organized to receive payments that exceed  legislatively established limits. For example, in July 2007 we reported that  USDA paid $1.1 billion in farm payments from 1999 to 2005 in the names of  over 170,000 deceased individuals. We recommended that USDA  strengthen its controls to prevent improper payments to deceased  individuals. In 2004, we recommended that because USDA did not have a  measurable standard for ensuring that farm program payments are going  to individuals who are actively engaged in farming—as required by statute  and USDA’s regulations—it allowed individuals with limited involvement  to receive these payments. USDA agreed that it would be beneficial to  have a measurable standard. However, to date, USDA has not taken any  action on our recommendation, stating that its regulations are sufficient  for determining active engagement in farming.
Under the Farm Security and Rural Investment Act of 2002 (2002 Farm  Bill), an individual or entity with an average adjusted gross income (AGI)  of over $2.5 million, over the previous 3 tax years immediately preceding  the applicable crop year, was ineligible for farm program payments unless  at least 75 percent or more of the average AGI was farm income, defined  as income from farming, ranching, or forestry operations. The AGI  provision of the 2002 Farm Bill covered crop years 2003 through 2008 and  applied to most farm program payments, including those for crop subsidy  payments (e.g., fixed payments based on historical production, known as  direct payments, and price support payments), conservation practices, and  disasters. USDA’s Farm Service Agency is responsible for ensuring that  only eligible individuals receive farm program payments, either directly or  as a member of an entity, and do not receive payments that exceed the  established limits. USDA has relied principally on individuals’ one-time  self-certifications that they do not exceed income eligibility caps, and their  commitment that they will notify USDA of any changes that cause them to  exceed these caps. To verify the certification, USDA field offices have  been able to request these individuals to submit their tax returns for  review. Individuals failing to provide accurate information to verify  compliance may not be eligible to receive farm program payments for the  year or years of the request.
Nevertheless, concerns remained about whether it was appropriate for  wealthy individuals to participate in taxpayer-funded farm programs. The  Food, Conservation, and Energy Act of 2008 (2008 Farm Bill), enacted on  June 18, 2008, revised the income eligibility caps for farm program  payments. In general, the 2008 Farm Bill provides that for crop years 2009  through 2012, a person or entity is ineligible for    direct payments if the individual’s or entity’s 3-year average farm income    all crop subsidy and disaster payments if the individual’s or entity’s 3-year  average non-farm income exceeds $500,000; or    all conservation program payments if an individual’s or entity’s 3-year  average non-farm income exceeds $1 million, unless at least 66.66 percent  of the individual’s or entity’s 3-year average AGI is attributable to activities  related to farming, ranching, or forestry.
In this context, we were asked to evaluate (1) how effectively USDA  implemented provisions under the 2002 Farm Bill that prohibited  payments to individuals or entities whose income exceeded $2.5 million  and who derived less than 75 percent of that income from farming,  ranching, or forestry operations; (2) the potential impact of the 2008 Farm  Bill’s AGI provisions on individuals who receive farm program payments;  and (3) the distribution of income for individuals receiving farm program  payments compared with all tax filers in 2006.
To address these issues, we reviewed USDA’s regulations, guidelines, and  other internal controls for implementing the provisions of the 2002 Farm  Bill, and we examined the AGI provisions of the 2008 Farm Bill. We also  spoke to USDA officials in headquarters, and the state office and one local  field office in Louisiana and Mississippi who were responsible for ensuring  that individuals applying for farm payments under the 2002 Farm Bill  complied with the AGI provision. We selected these offices to provide an  example of how USDA implements the AGI provisions and the information  we obtained cannot be generalized to all field offices. In addition, to  evaluate how effectively USDA implemented the 2002 Farm Bill provisions  that prohibited payments to individuals or entities with incomes from  sources other than farming, ranching, or forestry operations that exceeded  the specific limits, we matched USDA data on the 1.8 million individuals  who received farm program payments with Internal Revenue Service (IRS)  tax filer data for 2000 through 2006. We limited our review to individuals  who report their taxes as primary filers—the person who is listed first on  an IRS tax form, such as the Form 1040 (U.S. Individual Income Tax  Return). Although we did not analyze tax filer data reported by entities,  such as corporations, partnerships, or trusts, we did include tax filer data  for the individuals who make up the entity. For individuals with a 3-year  average AGI above $2.5 million, we determined whether at least 75 percent  of the income was derived from farming, ranching, or forestry operations.  We obtained farm income data for these individuals from IRS Form 1040,  IRS Schedule F (Profit or Loss From Farming), and IRS Form 4835 (Farm  Rental Income and Expenses). Schedule F and Form 4835 capture farm  income for individuals who report income from agricultural activities. For  all individuals with a 3-year average AGI above $2.5 million and with less  than 75 percent of their AGI derived from farming, ranching, or forestry  operations, we identified the amount of farm program payments subject to  the income eligibility provision. We also identified the amount of certain  program payments not subject to the income provision for these  individuals. To determine the potential impact of the 2008 Farm Bill’s AGI  provisions on individuals receiving farm program payments in 2006, we  categorized these individuals by their AGI amounts. We identified average  farm program payments for each of these categories and calculated the  farm payment income as a percentage of AGI. To determine the  distribution of income for individuals receiving farm program payments  compared with all tax filers, we compared the income distribution for  payment recipients with the income distribution for all U.S. tax filers in  2006, the latest year for which tax data were available.
We conducted this performance audit from August 2007 through  September 2008 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives. Appendix I  contains more detailed information on our scope and methodology.
subsections: section_title: Background
paragraphs: Individuals can receive farm program payments through various programs  linked to both their ownership interests and the amount and types of crops  they produce. (App. III lists USDA farm programs and payments made  between 2003 and 2006 under the 2002 Farm Bill.) Under the 2002 Farm  Bill, a person could receive farm program payments directly or through as  many as three entities in which the person held a substantial beneficial  interest—defined as a 10 percent or more interest in the operation. For the  purposes of the 2002 Farm Bill, a person was defined to include, among  other things, an individual, partnership, trust, corporation, charitable  organization, or state agency, who could receive payments (1) as an  individual and as a member of no more than two entities or (2) through  three entities and not as an individual. Under the 2002 Farm Bill,  individuals and entities were required to be eligible under the AGI  provision to receive certain USDA payments, including direct and counter- cyclical payments; payments under the Marketing Assistance Loan  Program; and conservation payments. More specifically:    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 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 predetermined 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 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 producers 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 addition, producers 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 producer would have received if the producer had had a loan.  Under the 2002 Farm Bill, producers also could purchase commodity  certificates that allowed them to redeem their marketing assistance loan at  a lower repayment rate and immediately reclaim their commodities under  the loan. The difference between the loan rate and the lower repayment  rate, called the commodity certificate exchange gain, was not subject to  the AGI provision.
Conservation payments provide assistance to producers to help them  safeguard environmentally sensitive land. For example, the Conservation  Reserve Program provides annual rental payments and cost-share  assistance to producers who contractually agree to retire their land from  agricultural purposes and keep it in approved conserving uses for 10 to 15  years. Other conservation programs include the Conservation Security  Program, the Conservation Stewardship Program under the 2008 Farm  Bill, Environmental Quality Incentives Program, Grassland Reserve  Program, and the Wetlands Reserve Program, which are generally  administered by the USDA’s Natural Resources Conservation Service.
The 2008 Farm Bill, which is in effect for crop years 2009 through 2012,  continues many of the 2002 Farm Bill’s provisions, including the programs  already subject to the AGI caps and programs that the 2008 Farm Bill  added. However, the 2008 Farm Bill changes, among other things, the AGI  cap by dividing it into two parts: non-farm income and farm income; both  are averages over a 3-year period. The 2008 Farm Bill sets a cap of  $500,000 for non-farm income for a person to receive crop subsidy  benefits, noninsured crop assistance (financial assistance to producers for  uninsurable specialty crops when low yields, loss of inventory, or  prevented planting occurs due to natural disasters), or disaster payments,  and sets a cap of $750,000 for farm income to receive direct payments. For  conservation programs, the farm bill sets a cap of $1 million non-farm  income, unless at least 66.66 percent of AGI is from farm income. The  farm bill also provides USDA discretion to waive the conservation cap for  “environmentally sensitive land of special significance.”
The 2008 Farm Bill also specifies types of income or benefits that must be  included in determining farm income. These include the production of  farm-based renewable energy; the sale of easements and development  rights of farm, ranch, or forestry land, water or hunting rights, or  environmental benefits; and the processing, storing, and transporting of  farming, ranching, or forestry commodities, including renewable energy.  The 2008 Farm Bill also requires the Secretary of Agriculture to conduct  audits of persons and legal entities most likely to exceed the AGI caps.  Furthermore, the new law requires persons and entities to provide the  Secretary of Agriculture, at least once every 3 years, with either (1)  information and documentation regarding AGI through procedures  established by the Secretary, or (2) a certification by a certified public  accountant or similar third party that the person or entity does not exceed  applicable limitations. It also allows individuals filing joint tax returns to  allocate their income and losses for purposes of applying for farm program  payments, which may help them individually meet the AGI eligibility  requirements even if applying jointly they could not. The 2008 Farm Bill  creates the Average Crop Revenue Election Program, which provides  producers with the option to participate in a state-level revenue protection  system if they are willing to forgo counter-cyclical payments and receive a  reduction in direct payments and the marketing assistance loan rate.  Payments under this new program are subject to the AGI provisions.
To receive farm program payments under the 2002 and 2008 farm bills, an  individual or entity must be “actively engaged in farming.” To be  considered actively engaged in farming, an individual must make  significant contributions to a farming operation in two areas: (1) capital,  land, or equipment and (2) personal labor or active personal management.  An entity is considered actively engaged in farming if the entity separately  makes a significant contribution of capital, land, or equipment and its  members collectively make a significant contribution of personal labor or  active personal management.
The Improper Payments Information Act of 2002 (IPIA) requires the heads  of executive branch agencies to annually review all programs and  activities 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 was made in an incorrect amount, including any payment to an  ineligible recipient.
section_title: Millions of Dollars in Farm Program Payments Went to Potentially Ineligible Individuals Because USDA Does Not Have Adequate Management Controls
paragraphs: USDA paid millions of dollars in farm program payments to individuals  who were potentially ineligible for these benefits on the basis of their AGI,  for 2003 through 2006. These payments occurred primarily because USDA  does not have management controls, such as reviewing an appropriate  sample of recipients’ tax returns, to verify that payments are going only to  individuals who do not exceed the income eligibility caps.
subsections: section_title: USDA Made Millions of Dollars in Farm Payments to Potentially Ineligible Individuals from 2003 through 2006
paragraphs: We identified 2,702 individuals—out of the 1.8 million individuals receiving  farm payments from 2003 through 2006—who were potentially ineligible  for farm payments because they had a 3-year average AGI that exceeded  $2.5 million and derived less than 75 percent of their income from farming,  ranching, or forestry operations. Nevertheless, USDA paid over $49 million  to these individuals. Table 1 shows the number of individuals who were  potentially ineligible to receive farm program payments under the 2002  Farm Bill’s AGI provisions and the amount of farm program payments they  received from 2003 through 2006. Furthermore, 427 of these individuals, or  16 percent, received potentially improper payments in each of the 4 years  we reviewed.
Moreover, USDA should have known that 87 of these 2,702 individuals  were ineligible for payments because it had noted in its own databases  that these 87 individuals exceeded the income caps and therefore were  ineligible to receive payments. These notations were based, in part, on  individuals’ certifications that they did not meet the AGI provisions. USDA  officials state that they relied on this information and could not explain  why these 87 individuals received a payment in a year in which they had  been properly identified as ineligible. As a result, we consider the  payments to these individuals as improper.
Of the approximately $49 million in federal farm program payments to  potentially ineligible individuals from 2003 to 2006, about $21 million went  to individuals as members of entities. As we have previously reported,  payments through entities have carried a higher risk of improper  payments. Of the 2,702 individuals we identified as receiving potentially  improper farm payments, about half—1,346—received these payments  through entities, according to our analysis of USDA’s and IRS’s data. The  remaining 1,356 individuals received payments directly from USDA. Table  2 shows the number of potentially ineligible individuals receiving farm  program payments through entities, and the amount of the payments, from  2003 through 2006.
The following provides examples of potentially improper payments to the  2,702 individuals who received farm program payments but reported a 3- year average AGI that exceeded $2.5 million and derived less than 75  percent of their income from farming, ranching, or forestry operations and  thus would generally not be eligible to receive the farm payments:    A founder and former executive of an insurance company received a total  of more than $300,000 in farm program payments in 2003, 2004, 2005, and  2006 that were subject to the AGI provisions.
An individual with ownership interest in a professional sports franchise  received a total of more than $200,000 in farm program payments for 2003,  2004, 2005, and 2006 that were subject to the AGI provisions.
An individual residing in a country outside of the United States received  farm payments totaling more than $80,000 for years 2003, 2005, and 2006  on the basis of the individual’s ownership interest in two farming entities.
A top executive of a major financial services firm received more than  $60,000 in farm program payments in 2003. The individual received these  payments directly, not through an entity.
A former executive of a technology company received about $20,000 in total  farm program payments in years 2003, 2004, 2005, and 2006 that were subject  to the AGI provisions. This individual also received more than $900,000 in  farm program payments that were not subject to the AGI provisions.
In 2004, we reported that because USDA’s regulations ensuring that  individuals are actively engaged in farming do not specify measurable  standards for what constitutes a significant contribution of active personal  management, they allow individuals with limited involvement in farming to  qualify for farm program payments. For example, we found individuals  who were members of a farming operation that received approximately  $700,000 in farm program payments in 2001 who asserted to USDA that  they provided personal management to the operation “on-site” and on a  “daily” basis even though these individuals lived several hundred miles  from the farming operation. We recommended that USDA develop and  enforce a measurable standard that defines a significant contribution of  active personal management. USDA agreed that it would be beneficial to  have a measurable standard. However, to date, USDA has not taken any  action on our recommendation, stating that its regulations are sufficient  for determining active engagement in farming.
According to our analysis of addresses reported to the IRS by the 2,702  individuals, 9 reside outside of the United States—in Hong Kong, Saudi  Arabia, and the United Kingdom, for example. The remainder resided in 49  of the 50 states, the District of Columbia, and the Virgin Islands. Five  states—Arizona, California, Florida, Illinois, and Texas—account for 36  percent of the individuals and 43 percent of the $49.4 million in farm  program payments. Furthermore, most of the 2,702 potentially ineligible  individuals resided in or near a metropolitan area while the remaining  individuals resided in small towns and rural areas. For example,  according to addresses on tax returns for the potentially ineligible  individuals from 2003 to 2006, 78 percent resided in or near a metropolitan  area, including urban and suburban areas, while the remaining 22 percent  resided in large towns, small towns, and rural areas. In contrast, for the 1.1  million individuals who received farm payments and filed a tax return in  2006, 36 percent resided in or near a metropolitan area and 64 percent  resided in large towns, small towns, and rural areas.
Two programs accounted for 79 percent of the $49.4 million in potentially  improper payments. Of the $49.4 million in farm payments, $39 million was  paid under the Direct and Counter-Cyclical Payments Program and the  Conservation Reserve Program. Figure 1 shows the percentage of the $49.4  million in potentially improper payments, by program, subject to the AGI  caps for 2003 through 2006.
Of the 2,702 individuals who received potentially improper payments,  1,202 individuals also received about $16 million in payments that were  not subject to the AGI provision, including commodity certificate  exchange gains under the Marketing Assistance Loan Program, and certain  crop disaster assistance payments and Livestock Compensation Program  payments.
section_title: USDA Does Not Have Adequate Management Controls to Identify Potentially Ineligible High- Income Individuals
paragraphs: Payments to potentially ineligible high-income individuals have occurred  because USDA does not have management controls, such as reviewing an  appropriate sample of recipients’ tax returns, to verify that payments are  going only to individuals who do not exceed the income eligibility caps. To  determine compliance with farm program payment requirements, USDA  has annually reviewed a sample of individuals receiving farm payments,  but this review has assessed compliance with farm program eligibility  requirements other than income—including the amount of payments a  farming operation received in the prior year and whether it experienced a  change in ownership. An individual’s income has not been a criterion in  selecting the sample. Furthermore, as we reported in 2004, USDA staff  conducts few reviews per office each year. For example, in one USDA  field office we visited for this review, an official told us that of the 13  farming operations selected for a review in 2005—the most recent year  completed at the time of our visit—USDA reviewed only 4. Reviews for the  remaining 9 farming operations were waived because they had been  reviewed in a previous year. Because USDA has drawn a sample of  individuals receiving farm payments that has not routinely tested for  income eligibility, it could not ensure that only individuals who have not  exceeded the income eligibility caps were receiving farm payments.  However, in the 2008 Farm Bill, Congress directed the Secretary of  Agriculture to establish statistically valid procedures to conduct targeted  audits of persons or legal entities most likely to exceed the legislation’s  income eligibility caps.
Our analysis of USDA and IRS data suggests that USDA’s primary method  for ensuring compliance—its annual review of a sample of individuals— has not always identified or prevented payments to individuals who were  not eligible under the AGI requirement. According to USDA officials, the  agency has relied principally on individuals’ one-time self-certifications  that they have not exceeded income eligibility caps and that they would  notify the agency of any changes that caused them to exceed these caps.  Officials in USDA’s Mississippi state office noted that producers who  believe their average income may exceed the AGI provision generally  contact their local USDA field office to discuss options. However, the  Mississippi officials also noted that it is rare for a producer to exceed the  2002 Farm Bill’s $2.5 million AGI threshold. According to these and other  USDA officials, resource constraints that hamper USDA’s ability to  examine complex tax and financial information contribute to USDA’s  inability to verify that each individual who receives farm program  payments were eligible under the AGI provision. Furthermore, USDA  headquarters officials noted that the need to collect and safeguard  individuals’ tax information, as well as field staffs’ competing  responsibilities, places constraints on USDA’s ability to verify compliance  with the AGI provision.
USDA headquarters officials also told us that computer matching of its  farm payment data with IRS tax filer data, as we did in our analysis, would  help USDA identify individuals who may not be in compliance with the  AGI provisions. We realize that under Internal Revenue Code Section 6103,  IRS is generally not authorized to provide USDA with tax filer information  for such purposes without a waiver from the individual tax filer. Individual  tax filers may authorize IRS, in writing, to disclose their return information  to a third party. USDA told us that it had not yet explored the possibility of  requiring farm program payment recipients to provide such waivers  authorizing IRS to share tax information with USDA.
section_title: 2008 Farm Bill Increases the Number of Individuals Likely Affected by the AGI Cap
paragraphs: Because of lower income eligibility caps under the 2008 Farm Bill, the  number of individuals whose AGI exceeds the caps will likely rise,  increasing the risk that USDA could make improper payments to more  individuals. As many as 23,506 individuals are likely to have incomes  above the new AGI cap of $500,000 for average non-farm income,  according to our analysis of the AGI provisions in the 2008 Farm Bill and  2006 tax returns for individuals receiving farm program payments. Table 3  shows the range of individuals receiving farm program payments in 2006  who potentially would have been ineligible for these payments if the 2008  Farm Bill’s AGI provisions had been in effect as well as the range of the  potentially ineligible farm payments, according to our analysis of data  from USDA and the individuals’ tax returns, including their Form 1040,  Schedule F, and Form 4835. See appendix I for details on the methodology  used to determine these ranges.
Several factors may influence the actual number of individuals affected by  the new AGI provisions. According to an official with USDA’s Economic  Research Service, some individuals with high income might make business  decisions that, while legal, would help them avoid the new AGI caps.  These decisions include leasing all or part of their land to individuals not  affected by the caps, and then indirectly receiving farm program payments  by charging a rental rate that includes the lost payments; dividing income  with a spouse for individuals who are married and file a joint tax return;  investing in equipment to increase tax deductions for depreciation and  immediate expensing; and delaying or accelerating income from  corporations in which the individual has controlling interest. Furthermore,  while forecasts for high crop prices through 2012 might increase  individuals’ farm income and AGI, an increase in the tax deduction for  “domestic production activities” beginning in 2010 might reduce the  impact of the AGI provisions on some individuals. The 2008 Farm Bill’s  directive to include the production of farm-based renewable energy,  production of livestock products, and the sale of farm equipment in the  definition of farm income might increase the number of individuals  ineligible for direct payments under the Direct and Counter-Cyclical  Payments Program.
In discussing the 2008 Farm Bill with USDA officials, they agreed that the  lower income eligibility thresholds will increase and complicate their  responsibilities. In particular, with the expanded definition of farm  income, field office staff no longer will be able to rely primarily on an  individual’s IRS Schedule F to determine farm income. Rather, other IRS  forms and schedules not used previously may now be included in USDA’s  eligibility determination. The USDA officials also stated that the split of  AGI into two types of income—farm and non-farm—together with  separate income caps for direct payments, crop subsidy and disaster  assistance payments, and conservation payments, adds to the complexity  for field office staff who must make eligibility determinations. In July 2008,  USDA published a notice in the Federal Register to provide additional  implementation information.
section_title: Individuals Who Receive Farm Program Payments Generally Report Higher Incomes Than All Tax Filers
paragraphs: Individuals participating in farm programs are three times more likely to  have an AGI exceeding $500,000 than all individuals who file taxes. We  found that 21 of every 1,000 individuals receiving farm payments reported  an AGI exceeding $500,000 in 2006 while only 7 of every 1,000 of all  individual tax filers reported income at this level or higher. Furthermore,  as figure 2 shows, 12 of every 1,000 individuals receiving farm program  payments reported AGI between $500,000 and $1 million compared with  about 4 of all tax filers who reported income at this level.
Of the individuals who received farm program payments and filed a tax  return in 2006, 9,651 reported an AGI exceeding $1 million and 22,931  reported an AGI exceeding $500,000. Individuals who participate in farm  programs also are over three times more likely to report a loss, that is,  negative AGI, than individuals who do not participate in farm programs.  Nearly 7 percent of individuals receiving farm payments reported no AGI  (that is, income of $0 or less), compared with only 1.9 percent of all tax  filers who reported no AGI. Individuals with no AGI received farm  program payments averaging $17,200, the highest average farm payment  among AGI ranges we analyzed. Conversely, average farm program  payments range from about $9,000 to $14,000 for individuals in the six  groups with an AGI exceeding $500,000. (App. IV provides a detailed  distribution of income of individuals receiving farm program payments for  all AGI ranges and the amount of farm payments, as well as the income  distribution for all tax filers.)
section_title: Conclusions
paragraphs: Thousands of individuals who may not have met the income eligibility  requirements under the 2002 Farm Bill nevertheless received payments,  making the payments potentially improper. The likelihood that even more  individuals will exceed income eligibility requirements and still receive  payments is expected to grow under the 2008 Farm Bill given the bill’s  new, more complex eligibility criteria.
In the past, USDA has relied on individuals’ one-time self-certifications  that they meet income eligibility requirements and their promise to notify  USDA if they no longer meet these requirements. As our analysis showed,  however, these self-certifications have not always proven reliable for all  recipients of farm program payments because USDA has not always  withheld payments from these individuals. Moreover, USDA’s principal  management control to ensure compliance with farm program  requirements—a review of a sample of individuals receiving high  payments or a change in operations—has not targeted high-income  individuals. The need for management controls to ensure individuals meet  income eligibility requirements will be even more critical under the 2008  Farm Bill, which has provided reduced income eligibility caps for farm  program payments.
The 2008 Farm Bill directs USDA to establish statistically valid procedures  to conduct targeted audits of persons and legal entities that are most likely  to exceed the income eligibility caps. We realize that under Internal  Revenue Code Section 6103, IRS is generally not authorized to provide  USDA with tax filer information for such purposes without a waiver from  the individual tax filer. Individual tax filers may authorize IRS, in writing,  to disclose their return information to a third party. USDA told us that it  had not yet explored the possibility of requiring farm program payment  recipients to provide such waivers authorizing IRS to share tax  information with USDA. Such efforts could help better ensure that  program funds benefit those engaged in farming as intended.
section_title: Recommendations for Executive Action
paragraphs: To provide greater assurance of program integrity, we recommend that the  Secretary of Agriculture direct the Administrator of the Farm Service  Agency to work with the Internal Revenue Service to develop a system for  verifying the income eligibility for all recipients of farm program  payments. If the Secretary determines that it does not have the authority  to develop such a system with the Commissioner of the Internal Revenue  Service, we recommend that the Secretary request this authority from  Congress, as appropriate.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided USDA with a draft of this report for review and comment.  USDA agreed with our recommendations. Nevertheless, USDA did not  agree with several of our findings. First, USDA noted that only a small  percentage of USDA’s total farm program payments were made to  individuals who exceeded the 2002 Farm Bill’s income eligibility caps.  However, our finding is consistent with the general distribution of income  among all tax filers:  only a very small percentage of all individuals who  file a tax return report an AGI in excess of $2.5 million to the IRS.  Furthermore, the number of individuals who exceed income eligibility  caps is likely to increase because the 2008 Farm Bill lowers these  eligibility caps. Therefore, USDA could be at greater risk of making  improper payments unless it has better management controls in place.
Second, USDA stated that we should not have discussed the requirement  of actively engaged in farming in this report. We disagree. We believe that  it is important to place our discussion of income eligibility requirements in  the context of other key eligibility requirements to provide a more  comprehensive understanding of the conditions under which individuals  may qualify for farm program payments.
Finally, USDA sought more information about the individual cases we cite  in this report of individuals whose AGI apparently exceeds the eligibility  requirements. However, Internal Revenue Code Section 6103 prohibits us  from disclosing any additional information.
USDA also provided technical corrections, which we have incorporated  into this report as appropriate. USDA’s written comments and our  responses are presented in appendix II.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from its  issue date. At that time we will send copies of this report to appropriate  congressional committees, the Secretary of Agriculture; the Director,  Office of Management and Budget; and other interested parties. In  addition, this report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
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  adjusted gross income (AGI) provisions under the Farm Security and  Rural Investment Act of 2002 (2002 Farm Bill) to identify potentially  improper payments to individuals with high incomes. In this context, we  were asked to evaluate (1) how effectively the U.S. Department of  Agriculture (USDA) implemented provisions under the 2002 Farm Bill that  prohibited payments to individuals whose 3-year average AGI exceeded  $2.5 million and who derived less than 75 percent of that income from  farming, ranching, or forestry operations; (2) the potential impact of the  Food, Conservation, and Energy Act of 2008’s (2008 Farm Bill) AGI  provisions on individuals who receive farm program payments; and (3) the  distribution of income for individuals receiving farm program payments  compared with all tax filers.
To evaluate how effectively USDA implemented the 2002 Farm Bill  provisions that prohibit payments to individuals who do not meet the AGI  provisions, we reviewed guidance that USDA field offices use to determine  farm program payment eligibility, including relevant statutes and  regulations and agency policy, such as the FSA Handbook on Payment  Limitations, 1-PL (Revision 1), as well as relevant studies prepared by  USDA’s Office of Inspector General and the Congressional Research  Service and our own past reports. In addition, we spoke with USDA  officials in headquarters and state and local field offices in Louisiana and  Mississippi who are responsible for ensuring that individuals who receive  farm program payments were eligible under the 2002 Farm Bill’s AGI  provisions that cap 3-year average AGI at $2.5 million, unless at least 75  percent is derived from farming, ranching, or forestry operations. We  selected these offices to provide an example of how USDA implements the  AGI provisions and the information we obtained cannot be generalized to  all field offices. We also spoke with officials from USDA’s Economic  Research Service on the implications of AGI provisions in the 2008 Farm  Bill for individuals who receive farm program payments. We also reviewed  USDA’s FY 2007 Performance and Accountability Report to understand  its assessment of internal controls for its farm programs, and Internal  Revenue Service (IRS) publications and guidance on reporting income.
We obtained and analyzed USDA’s computer databases for information on  individuals receiving farm program payments either directly or through an  entity, such as a corporation, general partnership, or trust, from 2003  through 2006. These databases included FSA’s Producer Payment  Reporting System, Permitted Entity file, and Subsidiary Eligibility file, as  well as payment files from USDA’s Natural Resources Conservation  Service. These databases contained detailed information on payment  recipients, such as social security numbers, payment amounts, the status  of recipients as individuals or members of entities, their ownership  interest in entities, types of entities, and additional organizational details.  These databases also contained 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.  Appendix III provides a listing of USDA farm programs and payments  made between 2003 and 2006 under the 2002 Farm Bill.
Using the USDA data described above, we identified approximately 2.6  million individuals who received farm payments between 2003 and 2006.  We forwarded the list to IRS and requested that IRS provide selected data  from Form 1040 (U.S. Individual Income Tax Return), Schedule F (Profit  or Loss from Farming), and Form 4835 (Farm Rental Income and  Expenses)—the principal IRS forms for reporting income from farming,  ranching, or forestry. IRS returned data for about 10.9 million returns for  tax years 2000 to 2006. We verified the accuracy of the matched records  through an automated name check to compare the individual’s name as  contained in the USDA data with the name of the tax payer in the IRS data.  In addition to the automated name comparison, we reviewed every name  that failed the check to confirm that the two names did not match. We did  not analyze tax filer data reported by entities, such as corporations,  partnerships, or trusts, but we did review tax filer data for the individuals  identified by USDA as members of an entity. At the conclusion of our  verification efforts, tax returns from about 1.9 million of the original 2.6  million individuals were validated.
To determine the number of individuals who received potentially improper  farm program payments, we calculated 3-year moving averages of AGI and  farm income, and identified individuals whose average AGI was at least  $2.5 million for the 3 years immediately proceeding the year in which they  received a farm program payment. This analysis identified 3,893  individuals whose tax returns indicated they did not meet the AGI  provisions for receiving farm program payments in one or more of years  2003 to 2006. We matched these 3,893 individuals with the data provided  by USDA to determine the types and amounts of farm program payments  these individuals received in each year. Our analyses showed that 2,702  individuals had AGI that exceeded the income eligibility cap and had  received potentially improper farm program payments. For payments  made to an entity, we attributed the payments to each member based on  the payment share of the member as recorded in FSA’s Permitted Entity  file.
We also identified the amount of certain program payments and benefits  not subject to the income provision for the 2,702 individuals. Payments  and benefits not subject to the AGI provisions of the 2002 Farm Bill  include those provided under the 2002 Cattle Feed Program, Conservation  Reserve Program (annual rental and incentive payments for contracts  signed prior to May 13, 2002), Florida hurricane disaster programs  (payments for debris removal), Marketing Assistance Loan Program  (commodity certificate exchange gains), Noninsured Assistance Program,  Peanut Quota Buyout Program, and Sugar Beet Disaster Program. We  identified programs not subject to the AGI provisions with the assistance  of FSA officials.
To evaluate the potential impact of the 2008 Farm Bill’s AGI provisions on  individuals who receive farm program payments, we identified 1.7 million  individuals who received farm payments in 2006 and matched these  individuals with 2006 data provided by IRS. After completing our name  validation tests, we identified 1.1 million tax returns for individuals  receiving farm payments in 2006. We categorized tax returns for these 1.1  million individuals by the 2008 Farm Bill’s farm and non-farm income  caps for direct payments, crop subsidy and disaster payments, and  conservation program payments—$750,000, $500,000, and $1 million,  respectively. For individuals who received conservation program  payments, we also compared their farm income with their AGI to  determine if at least 66.66 percent of their average AGI was derived from  farm income. To estimate non-farm income, we calculated the difference  between reported AGI and farm income for each tax return.
For joint tax returns, we assumed that the difference between the AGI and  farm income (Schedule F and Form 4835) represented non-farm income.  However, because individuals filing joint tax returns represented 70.5  percent of the 1.1 million returns for all individuals, we performed  additional steps for joint tax returns to account for the possibility that a  secondary filer on a joint tax return could have income that may be  categorized as either farm income, non-farm income, or both. Using the  2006 data, we developed 11 different scenarios to estimate the potential  impact of the 2008 Farm Bill’s AGI provisions on tax returns from  individuals who receive farm program payments. These scenarios included  non-farm income as values from 0 percent to 100 percent of the difference  between AGI and farm income, using 10 percent increments. Table 4  provides the results of our calculations for individuals whose tax filing  status was single or married filing jointly. For example, the table shows  that 3,594 individuals filing single tax returns and as many as 19,912  individuals filing joint tax returns, or a total of 23,506, are likely to have  incomes above the new AGI cap of $500,000 for non-farm income.
To evaluate the distribution of income of the 1.1 million individuals who  received farm program payments and filed a tax return in 2006, we  stratified these individuals by the amount of their AGI. We then identified  average farm program payments for each of these categories and  calculated the farm payment income as a percent of AGI. We compared  the income distribution for farm program payment recipients with the  income distribution for all individual tax filers in 2006, the latest year for  which data were available. Information for all tax filers is based on IRS’s  Statistics of Income data.
For our analyses of IRS’s and USDA’s data, we performed consistency  checks to confirm that the data contained the information required for our  comparisons. We eliminated duplicate records from both the USDA and  IRS data and ensured the internal consistency of the data by deleting any  cases with missing values critical for the analysis. When we matched  USDA records with IRS records, we confirmed that the USDA and IRS  records represented an accurate match through our automated name  verification check followed by the visual inspection for each failed match.  Only those individuals with farm income reported to the IRS who also  received farm payments were included in the analysis. Accordingly, we  believe the data we used in the analyses were sufficiently reliable for our  purposes. We did not independently verify the data from USDA’s and IRS’s  computer databases, but we discussed with agency officials, as  appropriate, the measures they take to ensure the accuracy of these data.  For the purposes for which the data were used in this report, these  measures seemed reasonable.
We conducted this performance audit from August 2007 through  September 2008 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the U.S. Department of Agriculture
paragraphs: The following is GAO’s response to the U.S. Department of Agriculture’s  letter dated October 9, 2008.
subsections: section_title: GAO’s Comments
paragraphs: 1.  The report number has changed to GAO-09-67.  2.  We recognized in the report that resource constraints limit USDA’s  ability to effectively enforce the adjusted gross income (AGI)  requirements. As we stated, according to USDA officials, these  resource constraints hamper the department’s ability to examine  complex tax and financial information, and field staff have other  competing responsibilities that limit the time available for enforcing  the AGI requirements.   3.  We acknowledge that a small percentage of USDA’s total farm program  payments were made to individuals who exceeded the 2002 Farm Bill’s  income eligibility caps. The small percentage is to be expected:  only a  very small percentage of all individuals who file a tax return report an  AGI exceeding $2.5 million to the IRS. Furthermore, the fact that only a  small percentage of recipients are potentially ineligible does not  relieve USDA of its responsibility to enforce the AGI requirements.  This percentage is also likely to increase because the 2008 Farm Bill  lowers the income eligibility caps. Therefore, USDA will be at greater  risk of making improper payments to more than the 2,702 individuals  we found unless it has better management controls in place.
USDA is correct in stating that not all of the farm programs and  payments listed in appendix III of this report were subject to the AGI  limitation under the 2002 Farm Bill. That table was not intended to list  only programs subject to the AGI limitation. To provide clarity, we  have included a note below the table in appendix III explaining this  fact.  4.  We believe that it is important to place our discussion of income  eligibility requirements in the context of other key eligibility  requirements to provide a more comprehensive understanding of the  conditions under which individuals may receive farm program  payments. Although USDA is correct that the requirements for actively  engaged in farming are not part of the AGI provision, we mention the  issue of actively engaged in farming in this report to provide more  information regarding concerns we have previously raised about  USDA’s oversight of farm program payments.    5.  As noted in the report, the 2008 Farm Bill directed the Secretary of  Agriculture to establish statistically valid procedures to conduct  targeted audits of persons or entities most likely to exceed the  legislation’s income eligibility caps. Therefore, to provide context for  our discussion on how USDA ensured recipients met eligibility  requirements, we provided information regarding concerns we had  previously raised in our 2004 report about how USDA selected farm  operations for compliance review.   6.  USDA is correct in stating that when the entity is AGI compliant and an  interest holder is not AGI compliant, the entity is still eligible to  receive a payment. However, the payment to the entity must be  reduced by the share held by that interest holder. In our analysis of  entities, we attributed payments to each interest holder based on the  payment share of the interest holder as recorded in the Farm Service  Agency’s Permitted Entity database. For the 1,346 potentially ineligible  individuals who we identify as receiving a payment through an entity,  USDA did not reduce the payment to the entity based on the share held  by the individual. (For further discussion of the methodology we used,  see app. I.)  7.  We have identified potentially ineligible recipients on the basis of their  reported AGI. While we cannot name these recipients, we believe that  providing as much demographic information as we can about these  recipients, such as whether they reside near the farming operation, is  helpful to users of this report.   8.  USDA believes we should provide more information about the  examples we cite in this report. Providing this information would allow  USDA, which does not have authority to access tax information, to  identify individual filers. Internal Revenue Code Section 6103 prohibits  us from disclosing any additional information. We note here that some  of the payments were issued directly to individuals while others were  issued indirectly through entities. Regarding USDA’s comment on  whether we made a commensurate reduction in the payment when the  payment was made to an entity, we attributed payments to each  interest holder based on the payment share of the interest holder as  recorded in the Farm Service Agency’s Permitted Entity database. With  respect to USDA’s comment on requesting authority to gain access to  information on potentially improper payments, we recommended that  the Secretary of Agriculture direct the Administrator of the Farm  Service Agency to work with the Internal Revenue Service to develop a  system for verifying the income eligibility for all recipients of farm  program payments. We further stated that if the Secretary determines  that it does not have the authority to develop such a system with the  Commissioner of the Internal Revenue Service, we recommended that  the Secretary request this authority from Congress, as appropriate.   9.  We believe that explaining our use of the term “potentially improper  payments” in the footnotes on pages 4 and 25 is sufficient.  10. Appendix I of this report specifies the documents we reviewed.  As we  noted, we reviewed guidance that USDA field offices use to determine  compliance with the AGI requirements, including relevant statutes and  regulations and agency policy and guidance. We believe that the intent  of the AGI eligibility requirement is clear in the 2002 Farm Bill.
section_title: Appendix III: U.S. Department of Agriculture Farm Program Payments by Program or Payment Type, Fiscal Years 2003-2006
paragraphs: Appendix III: U.S. Department of Agriculture  Farm Program Payments by Program or  Payment Type, Fiscal Years 2003-2006 (41,485) (148,398) (463,156)
532,968,808  (1,569) (341) (292,867,811) (8,828,137) (2,663,318) (248,116) (304,607,382) $15,913,996,321  $11,466,729,077  $20,237,646,107  Includes cotton user marketing certificate gains.
Includes the Apple and Potato Quality Loss Program, Apple Market Loss Assistance Program, Sugar  Beet Disaster Program, Quality Loss Program, Crop Loss Disaster Assistance Program, Florida  Hurricane Citrus Disaster Program, Crop Hurricane Damage Program, Hurricane Indemnity Program,  Florida Hurricane Nursery Disaster Program, Florida Hurricane Vegetable Disaster Program, Multi- Year Crop Loss Disaster Assistance Program, and Single Year Crop Loss Disaster Assistance  Program, as well as Crop Disaster North Carolina payments, Crop Disaster Virginia payments, and  Florida Nursery Loss payments.
Includes the Dairy Indemnity Program, Dairy Options Pilot Program, and Dairy Market Loss  Assistance Program.
Includes the Environmental Quality Incentives Program and the Automated Conservation Program  Environmental Long Term payments.
Includes the Livestock Assistance Program, Livestock Indemnity Program, Avian Influenza Indemnity  Program, 2002 Cattle Feed Program, Pasture Flood Compensation Program, and Pasture Recovery  Program.
Includes the Acreage Grazing Payments Program.
Includes supplemental appropriations for the Noninsured Assistance Program.
Includes the Tobacco Loss Assistance Program and Supplement Tobacco Loss Assistance Program.
Includes market loss assistance payments and production flexibility contract payments.
Includes the Agricultural Conservation Program, Oilseed Payment Program including supplemental  appropriations for the Oilseed Payment Program, Wool and Mohair Market Loss Assistance Program,  Yakima Basin Water Program, Idaho Oust Program, Livestock Compensation Program–Grants For  Catfish Producers, Annual Agreement for Agricultural Conservation Program payments, Extra-long  Staple Cotton Special Provision Program, Farm Storage Facility Loans, Finality Rule and Equitable  Relief, New Mexico Tebuthiuron Application Losses Program, Aquaculture Block Grant, Tree  Indemnity Program, Loan Deficiency Payments for Non-Contract Production Flexibility Contract  Growers, Milk Marketing Fee, Tri-Valley Growers Program, New York Onion Producers Program,  Market Loss Onion Producer Program, and Interest payments.
section_title: Appendix IV: Distribution of Income for Individuals Receiving Farm Program Payments Compared with All Tax Filers, 2006
subsections: section_title: Tax returns for individuals receiving
paragraphs: Average  adjusted gross  income per  per return (Dollars in  per return(Dollars in  thousands) thousands) thousands) $(90.1)
Average  adjusted gross  income per  per return (Dollars in  per return(Dollars in  thousands) thousands)
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Thomas M. Cook, Assistant  Director; Kevin S. Bray; Arthur L. James, Jr.; James R. Jones, Jr.; Leslie V.  Mahagan; Grant M. Mallie; Carol Herrnstadt Shulman; Tyra J. Thompson;  and James J. Ungvarsky 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-08-438T. Washington,  D.C.: January 31, 2008.
Federal Farm Programs: USDA Needs to Strengthen Management  Controls to Prevent Improper Payments to Estates and Deceased  Individuals. GAO-07-1137T. Washington, D.C.: July 24, 2007.
Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent  Improper Payments to Estates and Deceased Individuals. GAO-07-818.  Washington, D.C.: July 9, 2007.
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.
Suggested Areas for Oversight for the 110th Congress. GAO-07-235R.  Washington, D.C.: November 17, 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.
Taxpayer Information: Data Sharing and Analysis May Enhance Tax  Compliance and Improve Immigration Eligibility Decisions.   GAO-04-972T. Washington, DC.: July 21, 2004.
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.