Farm Programs: Changes Are Needed to Eligibility Requirements for Being Actively Involved in Farming
Published: 2013-09-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Agricultural producers receive about $5 billion annually in farm program payments for which being actively engaged in farming is required by the Farm Program Payments Integrity Act. GAO was asked to review FSA's processes for implementing actively engaged in farming regulations to determine payment eligibility.
This report examines, among other things, (1) FSA's compliance reviews of farming operation members' claimed contributions of active personal management and personal labor and (2) FSA state offices' timeliness in completing and reporting compliance reviews and their results. GAO reviewed FSA regulations and procedures, examined compliance review files in five states selected based on the number of assigned 2009 and 2010 compliance reviews (the latest available), analyzed compliance review data for those years, and interviewed FSA officials.
section_title: What GAO Found
paragraphs: Compliance reviews conducted by the U.S. Department of Agriculture's Farm Service Agency (FSA) to determine if farming operation members (individuals and entities) meet the payment requirements for being actively engaged in farming are hindered by broad and subjective requirements and difficulty in verifying individuals' evidence of claimed contributions. To be actively engaged in farming, an individual is to make significant contributions to that operation in personal labor or active personal management (or both). However, the definition of active personal management in FSA regulations is broad and can be satisfied by an individual performing at least one of eight services representing categories such as supervision of activities necessary in the farming operation. Also, FSA regulations allow farming operation members to make contributions of management without visiting the operation, enabling individuals who live significant distances from an operation to claim such contributions. An FSA state official said that the agency finds problems with management contributions more often for those who live significant distances from an operation. FSA officials have also noted that the requirements for what constitutes a management contribution are subjective. FSA's handbook states that it is difficult to measure what constitutes a management contribution and that such a contribution must be critical to the profitability of a farming operation. FSA officials said that making such a determination is difficult and subject to interpretation. Also, officials from FSA headquarters and state offices GAO visited said that verifying evidence of management contributions is challenging, in part due to the extent to which compliance reviews must rely on interviews with payment recipients. FSA recognizes that it has the authority to change the definition of what constitutes a significant contribution of management in its regulations. However, as FSA stated in 2010 final regulations for farm program eligibility and as a senior FSA official told GAO in August 2013, FSA does not plan to change the regulatory definition of active personal management without direction from Congress. In recent congressional deliberations on reauthorizing the Farm Bill, statutory changes were considered that would allow one person per farming operation to contribute management activities satisfying the criteria for being actively engaged in farming. The timeline for Farm Bill reauthorization is unclear.
Most FSA state offices did not complete and report their assigned 2009 and 2010 compliance reviews within FSA's expected time frame (i.e., within 12 months of being notified by FSA headquarters of which farming operations to review). FSA state offices completed and reported about 24 percent of their assigned 2009 compliance reviews and 14 percent of their 2010 compliance reviews on time. In addition, FSA headquarters did not always know the status and results of the 2009 and 2010 reviews for oversight purposes when GAO discussed this issue with them in November 2012. With a delayed awareness of several years, FSA cannot reasonably assess the level of recipients' compliance with the act and may be missing opportunities to recapture payments that were made to ineligible recipients. To improve its monitoring of compliance reviews, FSA in May 2013 implemented a database for state and county FSA officials to electronically report their assigned compliance reviews' status and results. However, FSA has not developed a time frame or plan for using the database and until the agency does so it cannot fully utilize the database and realize its intended benefits.
section_title: What GAO Recommends
paragraphs: Congress should consider modifying the definition of significant contributions of management activities, either as it did in recent deliberations on reauthorizing the Farm Bill, or in other ways designed to make contributions more clear and objective. GAO recommends that FSA establish a plan and a time frame for using its new database to monitor the status of compliance reviews. FSA concurred with GAOs findings and recommendation.

section_title: Letter
paragraphs: From 2009 through 2012, agricultural producers participating in U.S.  Department of Agriculture (USDA) farm programs collectively received an  average of approximately $5.2 billion per year in total payments for which  being actively engaged in farming is a requirement. These payments went  to producers, both individuals and entities, such as partnerships,  corporations, and trusts (app. I describes common types of farming  operation entities).
The Agricultural Reconciliation Act of 1987, was enacted as title I of the Omnibus Budget  Reconciliation Act of 1987, Pub. L. No.100-203 101 Stat. 1330. The relevant provisions of  the act became effective in the 1989 crop year. requirements and the potential for individuals, whose claims of eligibility  are questionable because they may have little involvement in a farming  operation, to receive farm program payments. Congress and others’  scrutiny of farm program payments has intensified in recent years in light  of federal budget pressures and record farm income.
For an individual to meet the criteria for being actively engaged in  farming, he or she must make significant contributions to a farming  operation in two areas: (1) capital, land, or equipment (or some  combination of the three) and (2) personal labor or active personal  management (or a combination of the two). For an entity, such as a  corporation, to meet the criteria for being actively engaged in farming, it  must separately make a significant contribution of capital, land, or  equipment, and its members must collectively make a significant  contribution of personal labor or active personal management to the  farming operation. For both individuals and entities, their share of a  farming operation’s profits or losses must be commensurate with their  contributions to the farming operation and those contributions must be at  risk.
USDA’s Farm Service Agency (FSA), which reports having 2,170 state  and county offices, is responsible for (1) administering the Farm Program  Payments Integrity Act and (2) ensuring that farming operation members  meet the actively engaged in farming criteria and that they do not receive  payments in excess of program payment limits. In particular, FSA state or  county officials examine the operating plans of all farming operations  applying for farm program payments and make an initial determination of  whether individuals, legal entities, and/or members of general  partnerships or joint ventures meet the requirements for being actively  engaged in farming. In addition, FSA headquarters annually selects  certain farming operations for compliance reviews to determine whether  they carried out their operating plans as represented when FSA made its  initial determination of whether farming operation members satisfied  actively engaged in farming requirements. Appendix II shows the number  of farming operations that FSA headquarters selected for 2009 and 2010  compliance reviews by state. According to an FSA official, these years  were the most recent for which compliance review information was  available at the time of our review.
We have previously questioned the adequacy of the current actively  engaged in farming requirements, particularly the definition of active  personal management, and we have reported that farming operation  members may be receiving payments despite questionable evidence to  support claims of active personal management contributions. For  example, in April 2004, we reported that the lack of a measurable  standard for what constitutes a significant contribution of active personal  management allows individuals and entities who may have little  involvement in a farming operation to be eligible for payments. We recommended that USDA develop and enforce measureable  requirements defining a significant contribution of active personal  management. However, USDA disagreed with our recommendation and  stated that its regulations and procedure for determining what constitutes  a significant contribution of active personal management were consistent  with the intent of Congress in the Farm Program Payments Integrity Act.
The definition of what constitutes a significant contribution is provided by regulation, not by  statute and therefore could be changed. We recognize the difficulty in determining the  significance of a management contribution under the current definition and the appeal of a  measurable, quantifiable standard. However, unlike labor, the significance of a  management contribution is not appropriately measured by the amount of time a person  spends doing the claimed contribution. The current regulatory definition of a significant  contribution of active personal management has been in effect for over 20 years;  Congress has not mandated a more restrictive definition during that time, including in the  2008 Farm Bill.
Most recently, as Congress deliberated the reauthorization of the 2008  Farm Bill, it considered changing the statute governing actively engaged  in farming. A provision in farm bill legislation approved by the Senate in  June 2013 would remove active personal management as a condition that  would satisfy the criteria for actively engaged in farming and would  require members of farming operations to make a significant contribution  of personal labor to be eligible for payments, with an exception that would  allow one farm manager per farming operation to provide management  activities. The House of Representatives approved farm bill legislation  that included a similar provision in July 2013.reauthorization of the Farm Bill is unclear.
You asked us to review FSA’s processes for implementing actively  engaged in farming regulations to determine payment eligibility. Our  objectives for this report were to examine (1) FSA’s compliance reviews  of farming operation members’ claims of significant active personal  management and personal labor contributions to meet actively engaged  in farming requirements, (2) the extent to which FSA state offices  completed and reported compliance reviews within expected time frames  and the results of reported reviews of management and personal labor  contributions, and (3) the distribution and amount of payments to farming  operations by type of entity and members’ claims of active personal  management or personal labor contributions.
To address the first objective, we reviewed the 2008 Farm Bill provisions  on actively engaged in farming, relevant USDA regulations, and FSA’s  handbook on payment eligibility and payment limits. We also  interviewed FSA state and county officials in five states— Arkansas,  Kansas, Louisiana, Mississippi, and Texas. We selected the states for  site visits based on the number of 2009 and 2010 compliance reviews  that FSA headquarters had assigned to them and the diversity of crops  produced in the states. In each of these states, we visited the FSA state  office and one or two county offices. We selected county offices for site  visits based on the number of 2009 and 2010 compliance reviews that  FSA headquarters had assigned to them and the county offices’ physical  location to limit travel costs. During these visits to FSA state and county  offices, we discussed compliance review processes and results with FSA  officials and examined examples of 2009 and 2010 compliance review  files. These files included supporting documents submitted by farming  operations that described their members’ contributions to the farming  operation in the areas of active personal management and personal labor  and FSA forms documenting compliance review processes and results.  We selected compliance reviews for examination based on the number of  farming operation members and the organizational complexity of the  farming operations that were reviewed. Information collected from the site  visits and derived from the compliance review files is illustrative and not  generalizable to all FSA offices or compliance review files for 2009 and  2010.
To address the second objective, we interviewed an FSA headquarters  official in charge of selecting farming operations for compliance reviews,  and we obtained and reviewed relevant documents related to compliance  reviews. For example, we obtained and reviewed FSA headquarters’  memos that notified states of the 2009 and 2010 selection of farming  operations and expected states to complete and report the respective  reviews by August 1, 2011 and December 1, 2012. We also obtained and  reviewed state offices’ hard copies of 2009 and 2010 compliance review  summary documents submitted to FSA headquarters. Further, we  obtained and analyzed 2009 and 2010 FSA electronic data on the results  of state offices’ compliance reviews of farming operations and their  members as of April 30, 2013. We examined data on the results of the  2009 compliance reviews of 11 FSA state offices and the 2010  compliance reviews of 9 FSA state offices that reported the results of 70  percent or more of their assigned reviews. We chose to examine data on  the compliance review results only for those state offices that reported at  least 70 percent of their 2009 and 2010 assigned reviews because  examining compliance reviews from state offices with lower completion  and reporting rates would not be representative of those offices’  compliance reviews. In particular, we analyzed the data to determine  the number of total members in the farming operations, the number and  percentage of members’ claiming contributions of active personal  management only, personal labor only, or a combination of both active  personal management and personal labor, and the number and  percentage of members meeting these claimed contributions. The results  of this analysis are limited to farming operations selected by FSA  headquarters and do not include results from farming operations selected  as spot checks or added by FSA state committees or county committees.  In addition, the results are not generalizable to the results of all 2009 or  2010 compliance reviews or the results of all states. To assess the  reliability of the data, we (1) interviewed FSA agency officials  knowledgeable about FSA’s database, (2) performed logic tests of  relevant data elements, and (3) reviewed related documentation. We  determined that the data elements related to the assigned and waived  compliance reviews were sufficiently reliable for the purposes of  determining the number of compliance reviews assigned to states in 2009  and 2010, the number of compliance reviews that were waived, and the  number of compliance reviews that states were directed to complete and  report to FSA headquarters after waivers were granted. We also  determined that the data were sufficiently reliable for the purposes of  showing the results of members’ contributions across 202 compliance  reviews from 11 states for the 2009 review year and the results of  members’ contributions’ across 119 compliance reviews from 9 states for  the 2010 review year.
To address the third objective, we obtained and analyzed 2009 through  2012 FSA data on applicable farm program payments made to entities.  We also analyzed 2012 data on entity members’ contributions of active  personal management, personal labor, and a combination of both to  farming operations to meet the requirements to be actively engaged in  farming and 2012 FSA data on applicable farm program payments  attributed to these members. We analyzed the data to determine the  distribution and amount of payments made based on individual members’  claims of active personal management or personal labor contributions  categorized by the number of members in various entities. To assess the  reliability of both FSA datasets, we (1) performed electronic tests of  pertinent data elements, (2) reviewed information about the data, and (3)  interviewed agency officials knowledgeable about the data. We  determined that the data were sufficiently reliable for the purposes of  determining the distribution and amount of payments to types of farming  operations based on individual members’ claims of active personal  management or personal labor contributions. This analysis is limited to  only those farm program payments that could be attributed to individual  members’ contributions and were recorded in FSA’s database. Appendix  III presents a more detailed discussion of our objectives, scope, and  methodology.
We conducted this performance audit from May 2012 to September 2013  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.
subsections: section_title: Background
paragraphs: In 1987, Congress enacted what is commonly known as the Farm  Program Payments Integrity Act, requiring that an individual or entity be  actively engaged in farming to receive farm program payments. To be  considered actively engaged in farming, the act requires an individual or  entity to provide the farming operation with a significant contribution of  inputs of capital, land, or equipment, as well as a significant contribution  of services of personal labor or active personal management. Table 1  shows the input and service contribution requirements that farming  operation members must meet to be considered actively engaged in  farming.
More specifically, as stated in FSA’s handbook, to satisfy the actively  engaged in farming criteria, an active personal management contribution  must, among other things, be critical to the profitability of the farming  operation. For personal labor, the contribution is to be an amount that is  the smaller of 1,000 hours annually or 50 percent of the total hours that  would be required to conduct a farming operation comparable in size to  the individual’s or legal entity’s commensurate share in the farming  operation.
In addition to meeting the input and services requirements, a farming  operation member’s contributions to the farming operation must be in  proportion to his or her share of the operation’s profits and losses, and  the contributions must be “at risk.” For a member’s contribution to be  considered at risk, there must be a possibility that the member could  suffer a financial loss. For example, if a member of a general partnership  or joint venture receives a guaranteed payment for any part of a  contribution of labor or management, that contribution is not at risk, and  the contribution is to be excluded in determining whether that member is  actively engaged in farming.
In addition to the requirements specified in the act, FSA’s handbook on  payment eligibility and payment limits provides direction for actively  engaged in farming determinations involving spouses. According to the  handbook, if spouses are farming together in a general partnership or  joint venture and one spouse is determined to be making a significant  contribution of active personal management, the other spouse is credited  with a significant contribution of active personal management. The other  spouse would still have to meet other requirements, such as making a  significant contribution of land, capital, or equipment.
subsections: section_title: Types of Payments and Payment Limits Subject to Actively Engaged in Farming Requirements
paragraphs: In accordance with the 2008 Farm Bill, to receive certain farm program  payments—that is, direct payments, counter-cyclical payments, and  Average Crop Revenue Election (ACRE) payments—a farming operation  member must be actively engaged in farming. Each of these types of  payments and their payment limits are described as follows:
Direct payments: Direct payments are fixed annual payments based  on a farms’ historical crop production. FSA calculates potential direct  payments using a formula that factors in “base acres,” a measure of a  farm’s crop production history based on the number of acres planted  on the farm during certain past years. The term base acres refers to a  farm’s average planted acreage of eligible crops during those years.  The direct payment formula uses base acres and multiplies that  number by the farm’s historical crop yield and a statutorily fixed  payment rate for each crop. The percentage and payment rates for  each crop are specified in farm bills. For 2009 through 2011, this  percentage was set at 83.3 percent; for 2012, it was set at 85  percent. The direct payment limit for general partnerships and joint  ventures is $40,000 per member or partner who meets payment  eligibility requirements. The direct payment limit for corporations,  limited liability companies, and other entity types is $40,000 per entity  that meets payment eligibility requirements. According to USDA data,  total direct payments from 2009 through 2012 averaged $4.7 billion  annually.
Counter-cyclical payments: Counter-cyclical payments are price  support payments that are made when the actual price of an eligible  crop falls below a legislatively determined target price. Like direct  payments, potential counter-cyclical payments are calculated using  the historical base acres and crop yields established for a farm. The  counter-cyclical payment limit for general partnerships and joint  ventures is $65,000 per member or partner who meets payment  eligibility requirements including being actively engaged in farming.  The counter-cyclical payment limit for corporations, limited liability  companies, and other entity types is $65,000 per entity that meets  payment eligibility requirements. According to USDA data, total  counter-cyclical payments from 2009 through 2012 averaged $348  million annually.
ACRE payments: An ACRE payment is a revenue-support payment  that is available as an alternative to counter-cyclical payments and  offered for certain crops if (1) actual state revenue (i.e., crop yield  multiplied by market price) is less than a guaranteed state level for the  crop and (2) the individual farm’s actual farm revenue for a crop is  less than the farm’s benchmark revenue for the crop. The acreage on  which ACRE payments are made cannot exceed a farm’s historical  base acres. For members of farming operations that elect to enroll in  ACRE, direct payments are reduced by 20 percent. The ACRE  payment limit for general partnerships and joint ventures is $65,000  per member or partner who meets payment eligibility requirements  including being actively engaged in farming. The ACRE payment limit  for corporations, limited liability companies, and other entity types is  $65,000 per entity that meets payment eligibility requirements.  According to USDA data, total ACRE payments from 2009 through  2012 averaged $120 million annually.
section_title: Potential for Farming Operations to Receive Payments Above the Payment Limit
paragraphs: As we reported in 2004, it is possible for farming operations organized  as general partnerships or joint ventures to receive payments above the  payment limit. For a farming operation with a large number of base acres  of crops, especially crops that garner higher payment rates per acre, such  as rice, peanuts, and cotton, the base acres and payment rates per acre  are large enough to result in potential direct payments that are  substantially more than the $40,000 payment limit for direct payments.  The actual direct payments would depend on the number of farming  operation members who meet payment eligibility requirements. For  example, a farming operation that was organized as a general partnership  or joint venture and had about 4,200 base acres of rice with an annual  direct payment rate of $96 per acre has the potential to receive up to  about $400,000 annually in direct payments, if it had 10 members who  met payment eligibility requirements (i.e., $40,000 for each of the 10  members). By contrast, if this farming operation had only 2 members who  met payment eligibility requirements, it would receive only $80,000  annually in direct payments (i.e., $40,000 for each of the 2 members). In  2004, we reported that some farming operations may have been  organized to overcome program payment limits and maximize the amount  of their farm program payments. One of the examples we cited was a  general partnership consisting of 11 members, several of whom appeared  to have little involvement in farming operations that received $1 million in  farm program payments on its 11,900 cropland acres in 2001.
In June 2013, the Senate approved farm bill legislation that would repeal  direct payments, counter-cyclical payments, and ACRE payments, while  creating new farm programs. In July 2013, the House of  Representatives approved farm bill legislation that included similar  provisions. Some of these farm programs would have payment limits.  Therefore, if this farm bill legislation is enacted into law, payment limits  may continue to be a financial consideration for farming operations.
section_title: FSA’s Process for Reviewing Farms’ Operating Plans
paragraphs: All participants in programs subject to the actively engaged in farming  requirements must complete a USDA form known as a farm operating  plan, either for an individual or legal entity. The information disclosed  about the farming operation on this form becomes the basis for the  determination of payment eligibility.the name of each farming operation member, the number of members  applying for farm payments, the members’ shares of profits and losses,  and the members’ roles in the farming operation and their claimed  contributions. FSA’s process for reviewing farm operating plans is shown  in figure 1.
section_title: FSA Compliance Reviews Are Hindered by Broad and Subjective Eligibility Requirements and Difficulty Verifying Evidence of Members’ Claimed Contributions
paragraphs: FSA compliance reviews of farming operation members’ claims of  eligibility to receive payments for being actively engaged in farming are  hindered by (1) a broad definition of active personal management, (2)  subjective requirements of what constitutes significant contributions of  management, and (3) difficulty in verifying individuals’ evidence of  claimed contributions of active personal management and personal labor.  Combined, these factors make it difficult for FSA to determine whether an  individual had made a significant contribution of active personal  management, potentially allowing individuals who may have had limited  involvement in a farming operation to receive payments.
subsections: section_title: Broad Definition of Active Personal Management Makes It Difficult for FSA to Determine Significant Contributions in Compliance Reviews
paragraphs: Based on our review of FSA’s regulations, its handbook on payment  eligibility and limitations, and a sample of 2009 and 2010 compliance  review files and interviews with FSA officials, we found that the definition  of active personal management is broad and makes it difficult for FSA to  determine whether an individual had made a significant contribution of  active personal management.
Under FSA’s regulatory definition, a person is considered to be providing  active personal management with respect to a farming operation if that  person is personally providing and participating in (1) the general  supervision and direction of activities and labor involved in the farming  operation or (2) services (whether performed on-site or off-site)  reasonably related and necessary to the farming operation. These  services may include any of the following:  supervision of activities necessary in the farming operation, business-related actions that include discretionary decision making, evaluation of the financial condition and needs of the farming assistance in structuring or preparing financial reports or analyses for  consultations in or structuring of business-related financing  arrangements for the farming operation, marketing and promotion of agricultural commodities produced by the acquiring technical information used in the farming operation, or any other management functions reasonably necessary to conduct  the farming operation and for which service the farming operation  would ordinarily be charged a fee.
Similarly, in the FSA handbook, the definition of active personal  management is broad and can be satisfied by providing any one of the  eight services identified in the regulations.personal management services makes it possible for farming operations  to claim payment eligibility for multiple individuals based on their  management contributions. In some instances, these individuals may  have little involvement in the farming operation. Management  responsibilities can be distributed among farming operation members so  as to increase the number of individuals who can claim eligibility for  payments based on management contributions. According to FSA  officials, a farming operation may have a primary manager who makes  the key decisions with various personal management services being the  responsibilities of other farming operation members. For example, one  individual may be responsible for crop insurance and land conservation  issues, a second individual may be responsible for equipment needs and  human resources, a third may be responsible for seed and fertilizer  purchases, and a fourth may be responsible for land acquisition and  landlord relations.
This broad range of active  The FSA regulations are also broad in that they allow farming operation  members to make significant contributions of active personal  management without physically visiting the farming operation. This allows  individuals who live significant distances from the farming operation to  claim that they made significant contributions of management. According  to an FSA state office official, compliance reviews find problems with  management contributions more often for individuals who live significant  distances from the farming operation than they find for individuals who  live near the farming operation. We examined address data from FSA’s  database to review the distances between the addresses of farming  operations and those of their individual members for the 50 farming  operations that received the highest payments subject to actively  engaged in farming requirements in 2012. We found that some of the individual members who claimed contributions of active personal  management had addresses that were hundreds of miles from the  address of the farming operation.
In addition, we found that the address data for farming operation  members are not always accurate in FSA’s database. We compared the  addresses for individual members with publicly available sources of  address data and found that a number of these individual members had  addresses that did not match the address shown in FSA’s database. For  example, 14 of the 50 farming operations in FSA’s database showed that  most or all of the individual members had the same address as the  farming operation, but our analysis of publicly available sources of  address data found that for all of these 14 farming operations, some of  the individual members’ addresses did not match the address shown in  FSA’s database. Based on these publicly available sources, some of  these individual members’ addresses were hundreds of miles from the  farming operation address. One of these farming operations, located in a  Midwestern state, received payments of about $400,000 in 2012,  according to our analysis of FSA data, and farmed about 25,000 acres,  according to FSA officials. This farming operation, organized as a general  partnership, included 6 corporations and 11 individual members of the  same family who ranged in age from 18 to 88. According to the publicly  available sources, 2 of the individuals, including the 88-year-old, had  addresses in south Florida. According to an FSA official, these 2  individuals claimed contributions of active personal management only,  and the other 9 individuals claimed contributions of a combination of  active personal management and personal labor. In addition, according to  the FSA official, the individual whose age was 18 in 2012 first received  payments in 2010. A compliance review of this farming operation for 2010  found that all of the members were making their claimed contributions.  According to an FSA official, the broad definition of active personal  management is difficult for FSA to apply in compliance reviews of such  farming operations.
According to an FSA headquarters official, the agency has not formally  considered changing the definition of active personal management since  FSA issued final regulations for farm program payment limits and  payment eligibility in 2010. At that time, FSA stated in responding to the  public comments in the Federal Register to its interim regulations: “The  definition of what constitutes a significant contribution is provided by  regulation, not by statute and could be changed.” Thus, FSA recognizes  that it has the authority to change the definition of what constitutes a  significant contribution for active personal management. And according to  FSA’s summary of the majority of the over 5,000 public comments on the  proposed regulations, “A more rigorous definition of active personal  management is needed; too many people per legal entity are qualifying  for payment eligibility based on only active personal management.”  Furthermore, without additional criteria or restrictions on the use of  management contributions to qualify for payments for which being  actively engaged in farming is required, the reliability and integrity of  FSA’s compliance reviews will continue to be uncertain, and the federal  government risks distributing millions of dollars to individuals who may  have little actual involvement in farming operations. In April 2004, we  reported that the lack of a measurable standard for what constitutes a  significant contribution of active personal management allows individuals  and entities who may have little involvement in a farming operation to be  eligible for payments. USDA disagreed with our recommendation, saying  that its regulations and procedure for determining what constitutes a  significant contribution of active personal management were consistent  with the intent of Congress in the Farm Program Payments Integrity Act.  Thus, no action has been taken to address this issue.
In this report, we have some findings that are similar to those we made in  2004. However, it appears unlikely that FSA will change its regulatory  definition of active personal management in view of its 2010 statements in  the Federal Register that the “current regulatory definition of a significant  contribution of active personal management has been in effect for over 20  years” and that “Congress has not mandated a more restrictive definition  during that time.” In August 2013, a senior-level FSA headquarters official  said that the agency does not plan to change the regulatory definition of  active personal management without direction from Congress. In  deliberations on reauthorizing the 2008 Farm Bill, Congress has recently  considered statutory changes that would affect the use of active personal  management. A provision in farm bill legislation approved by the Senate  in June 2013 would remove active personal management as a condition  that would satisfy the criteria for actively engaged in farming and would  require each member of a farming operation to make a significant  contribution of personal labor to be eligible for payments, with an  exception that would allow one farm manager per farming operation to  provide management activities. The House of Representatives  approved farm bill legislation that included a similar provision in July  2013. The timeline for the reauthorization of the Farm Bill is unclear.
section_title: Subjective Eligibility Requirements Hinder FSA’s Ability to Evaluate Claimed Contributions of Management
paragraphs: In reviewing FSA’s regulations, its handbook on payment eligibility and  limitations, and a sample of 2009 and 2010 compliance review files and  interviewing FSA officials, we found that the requirements for what  constitutes a significant contribution of active personal management are  subjective. Our findings are consistent with what we reported in 2004  when we stated that FSA officials acknowledged, that under current  regulations, only land, equipment, capital, and labor are measurable, and  that enforcing the current management contribution standard is difficult  because of its subjective nature.
FSA’s handbook acknowledges that it is difficult to measure what  constitutes a significant active personal management contribution.  According to the handbook, an individual’s or legal entity’s contribution of  active personal management is to be “critical to the profitability of the  farming operation, taking into consideration” the individual’s or legal  entity’s commensurate share in the farming operation. Officials we  interviewed from several FSA state offices said that determining whether  a management contribution is critical to the profitability of a farming  operation is difficult and subject to interpretation.
Such a subjective criterion makes it difficult for FSA to determine whether  an individual had made a significant contribution of active personal  management. To demonstrate this issue, an FSA state office official cited  a 2009 compliance review of a farming operation that consisted of eight  individual members: an elderly married couple, their three children, and  the children’s spouses. The parents were the only members who lived  near the farming operation, which had about 10,000 acres of crops. While  all eight of the individual members claimed contributions of active  personal management, the farming operation also employed three paid  farm managers. FSA compliance reviewers found that the three paid farm  managers provided the majority of the operation’s management and  concluded that the eight individuals did not provide significant  contributions of active personal management. The farming operation  appealed the compliance review determination to the FSA state  committee, which upheld the determination. The farming operation then  appealed to the National Appeals Division, which overturned the  compliance review determination. According to FSA documentation, the  National Appeals Division hearing officer stated that the compliance  review determination was erroneous because (1) while one full-time paid  farm manager and other employees implemented the farming operation  members’ decisions and performed “routine day-to-day farming operation  functions,” the eight individual members collectively made the significant  management decisions and (2) the full-time farm manager’s salary in  2009 was about 42 percent of what a third-party vendor would charge for  the same management services, leaving more than 50 percent to be  contributed by the farming operation’s eight members. FSA appealed  this decision to the National Appeals Division Director. Among other  things, FSA stated that “There is no regulatory basis or evidence in the  record to support using this dollar value basis comparison for which the  hearing officer uses it as a basis for the decision.” In addition, FSA stated  that “there is nothing that demonstrates exactly what each of these  supposed members who are seeking to qualify themselves as actively  engaged separate persons individually decided or actually did that  impacted the profitability of the farming operation.” However, the National  Appeals Division Director found the hearing officer’s findings were  supported by substantial evidence and rejected FSA’s arguments  regarding the members’ contributions of active personal management.  FSA stated that it did not agree with the Director’s determination.
section_title: Members’ Claimed Management Contributions Are Often Difficult to Verify
paragraphs: The Commission is concerned that some individuals may become eligible for payments  even when their active personal management is not contributing in a meaningful way to  the farming operation. This may occur because of the difficulty of measuring management  and determining compliance. Hence, the criterion of providing management may present a  very low threshold for qualifying for payments, thus facilitating creation of persons for  payment limit purposes.
FSA headquarters and officials from the five state offices we visited  consistently said that verifying evidence of significant contributions of  active personal management is challenging. One of the reasons for this  difficulty is the extent to which compliance reviews must often rely on  interviews with individual payment recipients. For example, when  compliance reviewers do not find sufficient documentation to support an  individual’s claim of a significant contribution of active personal  management, reviewers should interview the individual to determine his  or her knowledge of the farming operation and the claimed personal  management contribution, as outlined in FSA’s handbook. If, following the  interview, FSA officials determine that an individual did not make a  significant contribution of active personal management, the individual can  appeal the decision to the FSA state committee, which may entail, among  other things, the individual being interviewed for a second time.  Furthermore, even if the FSA state committee also concludes that the  individual did not make a significant contribution of management, the  individual can appeal the decision to USDA’s National Appeals Division,  which may result in the individual being interviewed a third time.  According to FSA officials, during appeal interviews, individuals with little  involvement in farming operations can overstate their management  contributions by giving rehearsed answers or providing new information  that has not been verified, often with assistance of hired consultants. For  example, in a case file document responding to a National Appeals  Division decision to overturn a compliance review determination, FSA  stated the management contributions were not accurately represented. In  addition, FSA stated the farming operation had “hired a representative  who has now come up with an entirely different explanation of each  partner’s actual duties and activities.” This indicates the concern of some  FSA officials that the characterization of management contributions can  change over time, making it difficult for them to verify claims of such  contributions.
In another example cited by an FSA state official, FSA did a compliance  review of a farming operation that had eight individual members from the  same family who each claimed to be making a significant contribution of  active personal management. The compliance review determined that  four of the individuals did not make a significant contribution. According to  an FSA official, this determination was based in part on interviews of  these four individuals who appeared to have limited knowledge of the  farming operation and did not provide information that confirmed their  personal management contributions. In addition, the four individuals did  not live close to the farming operation. The farming operation appealed  the compliance review determination to the FSA state committee, and the  four individuals were interviewed again. Based on these interviews and  the individuals’ written statements, the FSA state committee overturned  the compliance review’s determination for three of the individuals and  upheld the compliance review’s determination for the fourth individual.  The farming operation then appealed the determination on the fourth  individual to USDA’s National Appeals Division, and the fourth individual  was interviewed for a third time. In the third interview, according to the  FSA official, the individual demonstrated more knowledge of the farming  operation and provided more information about the claimed management  contribution. Based on the interview and the individual’s written  statement, the National Appeals Division overturned the determinations of  the compliance review team and the FSA state committee and found that  the individual had made a significant management contribution. According  to the official, these changes in both the written statements and interviews  show how the characterization of management contributions can change  over time, making it difficult for FSA to verify them.
section_title: Members’ Claimed Contributions of Personal Labor Can Be Difficult for FSA to Verify
paragraphs: Even with FSA’s regulations providing a quantifiable standard of a  significant contribution of personal labor, it can be difficult for FSA officials  to verify farming operation members’ claims of personal labor  contributions. While FSA compliance review staff who are located near  a farming operation can generally determine whether an individual lived  near a farming operation and could have provided the claimed personal  labor, those review staff may not be able to verify that the individual  actually performed the required hours of labor. For example, the evidence  available to review staff may be limited to reviewers’ own anecdotal  observations of the individual’s activities throughout the year.  Furthermore, if the review staff were not located near the farming  operation, they may not have access even to such anecdotal  observations.
In addition, it may be difficult for compliance reviewers to verify that an  individual’s labor contribution is “at risk,” as described in FSA’s handbook.
That is, there must be a possibility that the individual could suffer a  financial loss. However, according to an FSA official, it may be difficult  for compliance reviewers to determine that an individual was not  compensated for labor because the individual could receive  compensation from arrangements established outside of the farming  operation. For example, some large farming operations engage in  transactions with nonfarming operations that may be owned or have close  ties to the farming operation’s partners. These transactions include  activities such as purchasing the farming operation’s goods and  services—including land, equipment, and capital—and also selling the  farming operation’s crops. Such business arrangements may enable  nonfarming operations to compensate an individual for labor provided to a  farming operation.
section_title: Most State Offices Did Not Complete and Report Compliance Reviews in a Timely Manner, and Almost Always Found That Members Made Their Claimed Contributions
paragraphs: Most state offices did not complete and report their assigned 2009 and  2010 compliance reviews within FSA’s expected time frame (i.e., within  12 months of being notified by FSA headquarters of which farming  operations to review), according to our analysis of compliance review  summary documents that state offices submitted to FSA headquarters.  FSA headquarters did not always know the status and results of the  reviews for oversight purposes. For those reviews reported in 2009 and  2010 in FSA’s compliance review database, FSA almost always  determined that individual members of farming operations met the  standards for a significant contribution of active personal management or  personal labor as claimed.
subsections: section_title: Most State Offices Completed and Reported Compliance Reviews Late, and Headquarters Did Not Always Know the Reviews’ Status
paragraphs: Most state offices exceeded FSA’s expected time frame in completing  and reporting the results of their assigned 2009 and 2010 compliance  reviews. Some state offices did not report compliance review results on  time because they waited to submit reports to FSA headquarters until  they had completed all of their assigned reviews, according to an FSA  headquarters official. Thus, some reviews were completed but not  reported.
FSA expects state offices to complete and report their assigned  compliance reviews within 12 months of being notified by FSA  headquarters of which farming operations to review, according to an FSA  headquarters official. The 2009 and 2010 assigned reviews were to be  completed and reported by August 1, 2011, and December 1, 2012,  respectively. According to our analysis of compliance review summary  documents that state offices submitted to FSA headquarters, state offices  completed and reported about 24 percent of their 889 assigned 2009  compliance reviews and about 14 percent of their 305 assigned 2010   At the state  compliance reviews within FSA’s expected time frame. office level, 12 of the 33 state offices with assigned 2009 compliance  reviews completed and reported their reviews on time, and 21 did not. For  2010 reviews, 7 of the 26 state offices with assigned compliance reviews  completed and reported their reviews on time, and 19 did not.Furthermore, as of June 2013, 13 state offices had not completed and  reported the results of the compliance reviews assigned in 2009, and 15  state offices had not completed and reported the results of the  compliance reviews assigned in 2010. In this regard, as of June 2013,  about a third of compliance reviews assigned in 2009 had been  completed and reported by state offices, meaning that 70 percent had not  been completed and reported. Compliance reviews assigned in 2010  fared slightly better, as of that date, with 40 percent having been  completed and reported by state offices. Table 2 shows the extent to  which state offices completed and reported the results of their 2009 and  2010 compliance reviews within FSA’s expected time frame as of June  2013.
Moreover, in our interviews with FSA officials, we found that FSA  headquarters did not always know the status and results of state offices’  2009 and 2010 assigned compliance reviews for oversight purposes. In  some cases, FSA headquarters was not aware that state offices had not  started their assigned 2009 and 2010 compliance reviews. For example,  when we first contacted one state office in October 2012, it had not yet  begun conducting its 2009 and 2010 compliance reviews. Until we  brought this matter to FSA headquarters’ attention, they were unaware  that the office had not started its reviews. Similarly, FSA headquarters did  not know the status of 2009 and 2010 compliance reviews assigned to  several other state offices when we discussed this issue with them in  November 2012. This finding is consistent with what we found in our April  2004 report, where FSA headquarters officials were also not aware of  some state offices not conducting compliance reviews for several years.  With a delayed awareness of several years, FSA cannot reasonably  assess the level of recipients’ compliance with the act and may be  missing opportunities to recapture payments that were made to ineligible  recipients. Officials in the five state offices we visited cited travel budget  constraints and competing priorities as the main reasons why compliance  reviews were not completed and reported on time. In addition, FSA  headquarters officials said that budget constraints in recent years affected  state offices’ staffing levels and may have also affected their ability to  start and in turn complete 2009 and 2010 compliance reviews on time.  For example, budget cuts in fiscal years 2011 and 2012 resulted in a 12.5  percent reduction of field office staff, according to FSA headquarters  officials.
To improve its ability to monitor the status and results of compliance  reviews, in May 2013, FSA implemented the End-of-Year Review  Tracking System, a database available to state and county FSA officials  to electronically report their assigned compliance reviews’ status and  results. Prior to the database’s implementation, states would mail or fax to  FSA headquarters the results of their assigned compliance reviews,  according to an FSA official. An FSA headquarters official said FSA  expects to use the database to collect, track, and analyze compliance  reviews. The official told us that FSA also foresees using the database to  conduct various analyses, including of compliance review results to  enforce program payment limits. However, the database does not have  the capacity to generate reports from specific queries, such as those  related to individual farming operation members’ claimed contributions.  Without the capacity to generate queries related to farming operation  members’ contributions of management and labor, the analyses that FSA  can conduct for oversight purposes are limited. Moreover, as of July  2013, FSA had not developed a time frame or specific plan for using the  End-of-Year Review Tracking System to conduct oversight and support  programmatic decisions. FSA officials cited competing priorities, such as  conducting other payment eligibility oversight responsibilities, as reasons  why the agency had not developed a time frame and plan for using the  database. In the absence of a specific plan and time frame for using the  database, however, there is no guarantee that FSA will fully utilize the  End-of-Year Review Tracking System and realize the intended benefits of  the database.
FSA’s handbook highlights the importance of compliance reviews in the  oversight of implementation of payment eligibility provisions. More  specifically, FSA’s handbook states that compliance reviews help  maintain the integrity of farm program payment eligibility provisions. For  example, in its 2009 and 2010 compliance reviews, one state office said it  identified potential fraud in eight related farming operations with members  who were related and referred them to USDA’s Office of Inspector  General for further investigation. Compliance reviews serve as FSA’s  internal control for its farm program payments and safeguard the  agency’s assets by preventing and detecting errors and fraud. According  to the federal standards of internal control, such control should be  designed to provide reasonable assurance regarding the prevention of or  prompt detection of unauthorized acquisition, use, or disposition of an  agency’s assets. The substantial delays we identified in state offices’  completing and reporting compliance reviews to FSA headquarters and  FSA headquarters’ not being aware of the status of compliance reviews in  some state offices weakens the reviews’ effectiveness as an oversight  tool and as internal control. This undermines FSA’s ability to identify  fraud, waste, and abuse and avert potential improper payments, as well  as enforce farm program legislation and related regulations.
section_title: Compliance Reviews from Most Selected State Offices Found That Members Had Made Their Claimed Contributions
paragraphs: Our analysis of 2009 and 2010 compliance reviews reported by selected  FSA state offices (11 and 9, respectively) found that farming operation  members in most of these states always met the requirements for a  significant contribution of active personal management or personal labor  as they had claimed.
Table 3 shows the results of the 2009 compliance reviews that were  completed by 11 selected state offices and reported to FSA’s End-of-Year  Review Tracking System, as of April 2013. These compliance reviews  covered 202 farming operations and included a total of 775 members.
The compliance reviews reported by 10 of the 11 state offices found that  farming operation members always met the requirements for making a  significant contribution of active personal management, personal labor, or  a combination of active personal management and personal labor as they  had claimed. In total, 688 out of 775 farming operation members claimed  contributions of active personal management, either active personal  management only, or a combination of active personal management and  personal labor, and the compliance reviews found that 684 of these 688  members made the contribution they claimed. As we mentioned earlier,  an FSA official said the broad definition of active personal management is  difficult for FSA to apply in compliance reviews of farming operations.
Table 4 shows the results from the 2010 compliance reviews that were  completed by 9 selected state offices and reported to FSA’s End-of-Year  Tracking System, as of April 2013. These compliance reviews covered  119 farming operations and included a total of 831 members. Similar to  the 2009 compliance review results, results from the 2010 compliance  reviews show that most states found that farming operation members  always met the requirements for making a significant contribution of  active personal management, personal labor, or a combination of active  personal management and personal labor as they had claimed.
section_title: General Partnerships Received the Highest Payments and Had the Highest Percentage of Payments Based on Members’ Claims of Active Personal Management
paragraphs: In examining the distribution and amount of FSA’s 2012 farm payments to  farming operations by type of entity, general partnerships received both  the highest total and average payments. General partnerships received  most of their total payments based on individual farming operation  members’ claims of contributing active personal management. Moreover,  general partnerships’ percentage of payments based on individual  members’ claims of contributing active personal management were  highest for those general partnerships with the greatest number of  individual members.
subsections: section_title: Among Entities, General Partnerships Received the Highest Total and Average Payments
paragraphs: In 2012, approximately $1.5 billion in federal farm program payments  subject to actively engaged in farming requirements were distributed to  103,235 entities. Among these entities, general partnerships received the  highest total and average payments. Of these entities, 27,515 general  partnerships received $736 million or about half of the total payments  made to entities, and an average payment of approximately $27,000, as  shown in table 5. Joint ventures received an average payment of about  $21,000. Corporations and limited liability companies received average  payments of about $12,000 and $7,000, respectively. Other entities, such  as limited partnerships, received an average payment of about $3,700.
These results are consistent with the findings of our 2004 report. In  2004, we analyzed 2001 farm program payments subject to actively  engaged in farming requirements by type of entity, and we found that  general partnerships received higher average total payments relative to  the other entity types. One reason general partnerships receive higher  payments is that they can receive a payment amount up to the applicable  payment limit for each member—individual or entity—who meets payment  eligibility requirements.companies, and other entity types can only receive a payment amount up  to the applicable payment limit.
section_title: Conclusions
paragraphs: The Farm Program Payments Integrity Act established eligibility criteria  that limit payments to individuals and entities that are actively engaged in  farming while allowing farming operations to maximize the receipt of farm  program payments as long as all farming operation members meet  eligibility requirements. FSA administers the act and exercises oversight  of the over $5 billion annually distributed in farm program payments,  which is challenging, as well as time and resource-intensive.  Nevertheless, as federal fiscal pressures continue, it is important to  ensure that farm program payments do not go to individuals or entities  with little involvement in farming. FSA’s compliance reviews of individuals’  and entities’ eligibility to receive payments for being actively engaged in  farming are complicated by broad and subjective criteria for what  constitutes “significant” contributions of active personal management and  difficulty in verifying individuals’ evidence of their claimed management  contributions. FSA recognizes that it has the authority to change the  definition of what constitutes a significant contribution for active personal  management, but, as stated in its 2010 rulemaking, FSA also believes  that the current statute does not support a change in its regulations to  create a more restrictive definition of management contributions. Without  modification of the definition of management contributions to qualify for  being actively engaged in farming, the reliability and integrity of FSA’s  compliance reviews will continue to be uncertain, and the federal  government risks distributing millions of dollars to individuals who may  have little actual involvement in farming operations at a time of fiscal  constraints. In April 2004, we reported that the lack of a measurable  standard for what constitutes a significant contribution of active personal  management allows individuals and entities who may have little  involvement in a farming operation to be eligible for payments. However,  USDA disagreed with our recommendation, saying that its regulations  and procedures for determining what constitutes a significant contribution  of active personal management were consistent with the intent of  Congress in the Farm Program Payments Integrity Act. Thus, no action  has been taken to address this issue. In this report, we made findings that  are similar to those we made in 2004. In deliberations on reauthorizing  the 2008 Farm Bill, both the Senate and the House of Representatives  have recently considered statutory changes that would allow one person  per farming operation to contribute management activities as a condition  that would satisfy the criteria for actively engaged in farming. The timeline  for the reauthorization of the Farm Bill is unclear. In August 2013, a  senior-level FSA headquarters official said that the agency does not plan  to change the regulatory definition of active personal management  without direction from Congress.
Moreover, FSA headquarters did not always know the status and results  of the completion and reporting of state offices’ 2009 and 2010 assigned  compliance reviews for oversight purposes, when state offices completed  and reported only 24 percent and 14 percent, respectively, of their  reviews within FSA’s expected time frame. To the extent that FSA  headquarters is not aware of state offices’ delays in completing and  reporting reviews, the effectiveness of its compliance reviews as an  oversight tool is weakened. To its credit, in May 2013 FSA implemented a  database (End-of-Year Review Tracking System) that it intends to use for  improving its ability to monitor the status of compliance reviews and  analyzing their results. However, as of July 2013, FSA had not developed  a time frame or specific plan for using the database to conduct oversight  and support programmatic decisions, and the database does not have the  capacity to generate reports from specific queries, such as those related  to individual farming operation members’ claimed contributions. Until FSA  develops a plan and time frame for using the database, including using it  to generate specific queries, however, there is no guarantee that FSA will  fully utilize the database and realize its intended benefits, including to  generate reports from specific queries.
section_title: Matter for Congressional Consideration
paragraphs: To reduce the risk that individuals who have little involvement in a farming  operation use the active personal management provision to qualify for  farm program payments, Congress should consider modifying the  definition of contributions of management activities as a condition that  would satisfy the criteria for being actively engaged in farming, either as  both the Senate and the House of Representatives did in recent  deliberations on reauthorizing the Farm Bill, or in other ways designed to  make the criteria for such contributions more clear and objective.
section_title: Recommendation for Executive Action
paragraphs: To better monitor the status of compliance reviews and analyze their  results to ensure the integrity of farm program payment limitations and  payment eligibility provisions, we recommend that the Secretary of  Agriculture direct the Administrator of the Farm Service Agency to  establish a plan and a time frame for using the End-of-Year Review  Tracking System database to conduct oversight and support  programmatic decisions, including to generate reports from specific  queries.
section_title: Agency Comments
paragraphs: We provided the Secretary of Agriculture with a draft of this report for  review and comment. In an e-mail received September 12, 2013, the  Farm Service Agency’s Director, Operations and Analysis Staff, stated  that the Farm Service Agency concurred with our report’s findings and  recommendation and had no other comments.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of  Agriculture, the appropriate congressional committees, and other  interested parties. In addition, the report will be available at no charge on  the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or fennella@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 VI.
section_title: Appendix I: Common Ways Farmers Organize Their Farming Operations
paragraphs: Farmers organize their farming operations in various ways to reduce their  exposure to the financial risks of farming. For example, certain business  structures may limit a farmer’s liability when the farming operation has  legal problems or debt that cannot be paid from its farm earnings. Some  of the most common ways farmers organize their business and how these  business organizations are treated under payment limitation rules are as  follows:
Sole proprietorship. Most farming operations are owned, operated,  and managed by a single individual. A sole proprietorship has no legal  existence independent of its owner, which means that only the owner,  not the farming operation, can be sued. Owners of sole  proprietorships are personally liable for all their farm’s debts.
Joint ventures. A joint venture is defined by the Farm Service Agency  (FSA) as a short-term association of individuals or entities, where the  association exists without an actual partnership. As with sole  proprietorships, joint operations have no legal existence independent  of their owners. The liability for debts is shared by the joint venture’s  members
General partnerships. A general partnership is composed of two or  more individuals or entities, formed under state law, and subject to the  terms of a formalized agreement. In a general partnership,  responsibility for management, profits, and, the liability for debts is  shared by the members. FSA makes farm program payments directly  to the partnership rather than to the individual partners, which may be  individuals or entities. Each partner may be able to qualify the general  partnership for additional payments equal to the applicable payment  limit. Each partner is personally liable for his or her own conduct and  for the conduct of those under his or her direct supervision, as well as  negligence, wrongful acts, and misconduct of other partners and  partnership employees. Partners are personally liable for partnership  commercial obligations such as loans or taxes.
Corporations. Corporations have a separate legal existence from their  owners, meaning that the corporation rather than the owners is  ordinarily responsible for farm business debts, and the corporation  can be sued. As a result, some individuals may choose the corporate  form of farm business organization to protect their personal assets in  case of farm financial difficulties.
Limited liability companies. Limited liability companies are a hybrid  form of business entity because they have the limited liability feature  of a corporation and the income tax treatment of a general  partnership. Their owners are called members.
Limited liability partnerships. Limited liability partnerships, another  hybrid organizational form, eliminate the liability of an individual  partner for negligence, wrongful acts, and misconduct of other  partners and partnership employees. Each partner remains personally  liable for his or her own conduct and for the conduct of those under  his or her direct supervision. Partners remain personally liable for  partnership commercial obligations such as loans or taxes.
Limited partnerships. Limited partners in a limited partnership are  investors 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.
Other. Other types of entities that may qualify as one member under  current payment limitation rules include an irrevocable trust, a  revocable trust combined with the grantor of the trust, an estate, or a  charitable organization.
section_title: Appendix II: Farming Operations That Farm Service Agency Headquarters Selected for 2009 and 2010 Compliance Reviews, by State
paragraphs: FSA headquarters annually selects certain farming operations for  compliance reviews to determine whether they carried out their operating  plans as represented when FSA made its initial determination of whether  farming operation members satisfied actively engaged in farming  requirements. To select farming operations for compliance reviews, FSA  uses various criteria, such as whether a farming operation underwent an  organizational change in the past year. Table 7 shows the number of  farming operations by state that FSA headquarters selected for 2009 and  2010 compliance reviews. (According to an FSA official, these are the  most recent years for which state office compliance reviews had been  completed and reported to FSA headquarters at the time of our review.)  The 2009 and 2010 assigned reviews were to be completed and reported  by August 1, 2011, and December 1, 2012, respectively.
section_title: Appendix III: Objectives, Scope, and Methodology
paragraphs: Our objectives were to examine (1) the U.S. Department of Agriculture’s  (USDA) FSA’s compliance reviews of farming operation members’ claims  of significant active personal management and personal labor  contributions to meet actively engaged in farming requirements; (2) the  extent to which FSA state offices complete and report compliance reviews  within expected time frames, and the results of reported reviews of  management and labor contributions; and (3) the distribution and amount  of payments to farming operations by type of entity and members’ claims  of active personal management or personal labor contributions.
7 C.F.R. pt. 1400. most recent for which compliance reviews were to have been completed  when we conducted our review. In particular, we examined files’  supporting documents submitted by farming operations that described  their members’ contributions to the farming operation in the areas of  active personal management and personal labor and FSA forms  documenting compliance review processes and results. Some examples  of supporting documents we reviewed include loan documents, work  activity ledgers, and signed canceled checks. We selected the states for  site visits based on the number of 2009 and 2010 compliance reviews  that FSA headquarters had assigned to them and the diversity of crops  produced. Within the states we visited, we selected county offices for site  visits based on the number of 2009 and 2010 compliance reviews that  FSA headquarters had assigned to them and the county offices’ physical  locations to limit travel costs. We selected compliance reviews for  examination based on the number of farming operation members and the  organizational complexity of the farming operations that were reviewed.  Information collected from the site visits and derived from the compliance  review files is illustrative and not generalizable to all FSA offices or  compliance review files for 2009 and 2010.
To determine the extent to which FSA state offices completed and  reported compliance reviews within expected time frames, we interviewed  an FSA headquarters official in charge of choosing the annual  nongeneralizable selection of farming operations for compliance reviews,  and we obtained and reviewed relevant documents related to compliance  reviews, such as FSA headquarters’ memoranda notifying states of time  frames for completing and reporting the results of 2009 and 2010  compliance reviews. According to the memoranda, FSA headquarters  notified states of the 2009 nongeneralizable selection of farming  operations on August 19, 2010, and expected states to complete and  report the reviews’ results by August, 1, 2011. For 2010 compliance  reviews, FSA headquarters notified states of the nongeneralizable  selection of farming operations on November 30, 2011, and expected  states to complete and report the reviews’ results by December 1, 2012.  We also obtained and analyzed 2009 and 2010 compliance review data  reported to FSA’s End-of-Year Review Tracking (EYRT) System as of  April 30, 2013. FSA’s EYRT is a web-based system to which state and  county FSA offices report information and results related to annual  compliance reviews. In particular, we analyzed the data to determine the  number of farming operations selected by FSA headquarters for 2009 and  2010 compliance reviews, the number of reviews that were waived, and  the number and percentage of compliance reviews (after waivers)  reported to FSA headquarters by state offices within FSA’s expected time  frame. If a farming operation was listed in the EYRT for 2009, we included  it in 2009 compliance reviews. If a farming operation was listed in the  EYRT for 2010, we included it in 2010 compliance reviews. We did not  include three farming operations for either 2009 or 2010 because they  were not associated with a year in the EYRT, and FSA officials could not  determine the year to which they belonged. We then determined the  number of selected farming operations that were waived for compliance  reviews. If a farming operation was flagged in the EYRT as waived, we  counted it as waived in its corresponding year. We then subtracted the  waived farming operations from those selected by FSA headquarters to  determine the number of assigned farming operations that remained and  that states were required to complete and report to FSA headquarters for  2009 and 2010. The results of this analysis are limited to compliance  reviews selected by FSA headquarters and did not include those  compliance reviews added as required by spot checks or those added by   To assess the reliability of  state offices or state and county committees.relevant EYRT data elements, such as those related to assigned, waived,  completed, and reported compliance reviews, we (1) interviewed FSA  agency officials knowledgeable about the database; (2) reviewed related  documentation; and (3) performed logic tests of relevant data elements.  We determined that the data elements related to the assigned and waived  compliance reviews were sufficiently reliable for the purposes of  determining the number of compliance reviews assigned to states in 2009  and 2010, the number of compliance reviews that were waived, and the  number of compliance reviews that states were required to complete and  report to FSA headquarters after waivers were granted. However, the  EYRT data element related to completion of compliance reviews was not  sufficiently reliable for determining the number of 2009 and 2010  compliance reviews that state offices completed and reported to FSA  headquarters within the expected time frame after waivers were granted  for two reasons. First, as of April 30, 2013, not all states reported the  completion status of compliance reviews to the EYRT. Second, some  states may have completed their assigned 2009 or 2010 compliance  reviews but may have not reported them in EYRT as completed.
Because not all state offices reported the completion status of their  assigned compliance reviews in the EYRT, we instead obtained and  reviewed hard copies of FSA forms submitted by state offices to FSA  headquarters for review years 2009 and 2010. We reviewed state offices’  forms because they summarize compliance review results, list the  number of compliance reviews selected by FSA headquarters that were  assigned and completed and reported by state offices, and the date that  state offices reported their results. If a state office’s hard copy form  indicated that the state office reported to FSA headquarters the results of  their assigned 2009 and 2010 compliance reviews on or before August 1,  2011, and December 1, 2012, respectively, then we included that state  and its number of completed compliance reviews assigned by FSA  headquarters in the total count of completed and reported compliance  reviews that were reported to FSA within the expected time frame. We  compared the total count of completed and reported compliance reviews  within FSA’s expected time frame with the number of total assigned  compliance reviews after waivers to derive the percentage of 2009 and  2010 compliance reviews that states completed and reported in a timely  manner. The results of this analysis are limited to compliance reviews  selected by headquarters and did not include those compliance reviews  added as spot checks or those added by state offices or state and county  committees. We assessed the reliability of hard copies of state offices’  forms submitted to FSA headquarters by interviewing agency officials  knowledgeable about the forms and who received the forms from the  state offices. We determined that the data in the forms were sufficiently  reliable for the purposes of determining the number and percentage of  2009 and 2010 compliance reviews that states completed and reported to  FSA headquarters within FSA’s expected time frame.
To determine the results of personal management and personal labor  contributions in reported reviews, we also obtained and analyzed selected  2009 and 2010 compliance review data from FSA’s EYRT as of April 30,  2013. We examined only the results of the 2009 compliance reviews of 11  FSA state offices and the 2010 compliance reviews of 9 FSA state offices  that reported the results of 70 percent or more of their assigned reviews.
We chose to examine the compliance review results only for those state  offices that reported at least 70 percent of their 2009 and 2010 assigned  reviews because examining compliance reviews from state offices with  lower completion and reporting rates might not be representative of those  offices’ compliance reviews. Reviews for which the results were reported  may have been more likely to find that farming operation members had  made their claimed contributions, for example, if the offices employed a  strategy of pursuing easier or more clear-cut cases first. Similarly, relative  to the compliance reviews that were not reported, the results of reviews  that were reported may have been from compliance reviews that were  easier to complete because the evidence that farming operation members  were making their claimed contributions was unambiguous, and therefore  allowed offices to complete these faster, for example. In examining the  results of the 2009 compliance reviews of 11 FSA state offices and the  2010 compliance reviews of 9 FSA state offices, we determined the  number of total members in the farming operations, the number and  percentage of members’ claiming contributions of active personal  management only, personal labor only, or a combination of both active  personal management and personal labor, and the number and  percentage of members meeting these claimed contributions. The results  of this analysis do not include results from farming operations selected as  spot checks or those added by FSA state committees or county  committees. In addition, the results are not generalizable to the results of  all 2009 or 2010 compliance reviews or the results of all states. We  assessed the reliability of relevant data EYRT elements or those related  to members’ contributions of active personal management, personal labor  or a combination of both by (1) interviewing agency officials  knowledgeable about the data, (2) performing logic tests of relevant data  elements, and (3) reviewing related documentation on the data. We  determined that the data in these data elements were sufficiently reliable  for the purposes of showing the results of members’ contributions across  202 compliance reviews from 11 states for the 2009 review year and the  results of members’ contributions’ across 119 compliance reviews from 9  states for the 2010 review year.
To determine the distribution and amount of payments to farming  operations by type of entity, we obtained FSA’s Direct Attribution  Payment and Business Party Share databases, and we analyzed 2009  through 2012 data on applicable farm program payments made to  entities. These applicable payments—direct, counter-cyclical, and  Average Crop Revenue Election—are subject to actively engaged in  farming requirements. When analyzing FSA’s data, we determined the  total, percentage and average of applicable payments distributed by type  of entity. The entities in FSA’s database included the following:  individuals operating as a small business.
In our report, we consolidated limited partnerships, estates, irrevocable  and revocable trusts, and individuals operating as a small business into a  separate entity category called “other” because these entities individually  represented a smaller number of entities, and because the focus of our  analysis was on the other types of business entities. We further analyzed  the distribution of payments made to entity types by their number of  members. For each type of entity, we analyzed the distribution of  payments when the entity type consisted of 2, 3 through 5, 6 through 10,  and 11 or more members. We assessed the reliability of FSA’s 2009  through 2012 data on applicable farm program payments made to entities  by (1) performing electronic tests of pertinent data elements, (2) reviewing  information about the data, and (3) interviewing and communicating with  agency officials knowledgeable about the data. We determined that the  data were sufficiently reliable for the purposes of reporting on the  distribution and applicable 2012 farm program payments made to farming  operations by type of entity and their number of members.
To determine the distribution and amount of payments made based on  members’ claims of active personal management or personal labor  contributions by entity type, we obtained the information from FSA’s  Business File system of files and we used that in combination with the  Direct Attribution Payment data for 2012. We analyzed 2012 FSA data on  members’ contributions of active personal management, personal labor,  and a combination of both to a type of farming operation or entity, and  2012 FSA data on applicable farm program payments attributed to these  members. In our analysis, when we linked the Business File and Direct  Attribution Payment databases, we attributed individual’s contributions— not member’s contributions— of active personal management, personal  labor, and a combination of both to applicable farm program payments   Using these data, we analyzed the distribution and amount of  made.payments made based on individual members’ claims of active personal  management or personal labor contributions. We analyzed these results  by type of entity. As with previous analysis on FSA data, these types of  entities included general partnerships, joint ventures, corporations, limited  liability companies and five other types that we consolidated into an  “other” category. We further analyzed the distribution of payments to  individual members and linked them to information on their contributions  to farming operations; we classified each entity type by size category; that  is, entity types were divided into those with 1, 2, 3 through 5, 6 through  10, and 11 or more individual members. When we matched the Business  Party Share data and Direct Attribution Payment data, we were able to  match approximately 91 percent of the total payment dollars to their farm  contribution record. We spoke with FSA officials who explained that these  data are continuing to be updated and are gradually becoming more  complete as all the individual records migrate into the Business Party  Share File database. As a result, our analysis is limited to only those farm  program payments that could be attributed to individual members’  contributions that were recorded in the Business Party Share File. We  assessed the reliability of both FSA datasets by (1) performing electronic  tests of pertinent data elements, (2) tracing a sample of the data to their  original source, (3) reviewing information about the data, and (4)  interviewing and communicating with agency officials knowledgeable  about the data. We determined that the data were sufficiently reliable for  the purposes of determining the distribution and amount of payments to  types of farming operations based on members’ claims of active personal  management or personal labor contributions for only those farm program  payments that could be attributed to individual members’ contributions  that were recorded in the Business Party Share File.
From the 50 entities that received the highest payments subject to  actively engaged in farming requirements in 2012, we selected entities  from a variety of states and contacted FSA state office officials to confirm  the number of members (i.e., individuals and entities) claiming  contributions of active personal management, personal labor, or a  combination of active personal management and personal labor. In  addition, we examined address data from FSA’s database to review the  distances between farming operation addresses and individual members’  addresses for the 50 entities. We also compared the addresses for  individual members with publicly available sources of address data with  their addresses shown in the FSA database.
We conducted our review from May 2012 to September 2013 in  accordance with the 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 IV: Distribution and Amount of Farm Program Payments in General Partnerships, Categorized by Number of Individual Members and Grouped by Type of Contribution, 2012
subsections: section_title: Number of individual members 1
paragraphs: The farm program payments in this table are the payments that are subject to actively engaged in  farming requirements.
This table contains approximately 89 percent of the payments distributed to general partnerships that  were found to be based on individual members’ contributions in FSA’s contributions database. At the  time of our analysis, these data were continuing to be updated and were gradually becoming more  complete.
Not all payment recipients and their related contributions data are included in the Farm Service  Agency’s contributions database. For some of the payment recipients included in the Farm Service  Agency’s contributions database, no contribution was identified. We did not include these payments  in this table.
Total percentage of payments based on contributions in this table may not total to 100 because of  rounding.
section_title: Appendix V: Distribution and Amount of Farm Program Payments in Joint Ventures, Categorized by Number of Individual Members and Grouped by Type of Contribution, 2012
subsections: section_title: Number of individual members 1
paragraphs: The farm program payments in this table are the payments that are subject to actively engaged in  farming requirements.
This table contains approximately 94 percent of the payments distributed to joint ventures that were  found to be based on individual members’ contributions in the Farm Service Agency’s contributions  database. At the time of our analysis, these data were continuing to be updated and were gradually  becoming more complete.
Not all payment recipients and their related contributions data are included in the Farm Service  Agency’s contributions database. For some of the payment recipients included in the Farm Service  Agency’s contributions database, no contribution was identified. We did not include these payments  in this table.
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Thomas M. Cook (Assistant  Director), Kevin Bray, Gary Brown, John Delicath, Michael Kendix, Anne  Rhodes-Kline, Carla Rojas Paz, Dan Royer, and Vasiliki Theodoropoulos  made key contributions to this report.
section_title: Related GAO Products
paragraphs: Farm Programs: Additional Steps Needed to Help Prevent Payments to  Participants Whose Incomes Exceed Limits. GAO-13-741. Washington,  D.C.: August 29, 2013.
Farm Programs: USDA Needs to Do More to Prevent Improper Payments  to Deceased Individuals. GAO-13-503. Washington, D.C.: June 28, 2013.
Farm Programs: Direct Payments Should be Reconsidered. GAO-12-640.  Washington, D.C.: July 3, 2012.
Farm Bill: Issues to Consider for its Reauthorization. GAO-12-338SP.  Washington, D.C.: April 24, 2012.
Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent  Payments to Individuals Who Exceed Income Eligibility Limits.   GAO-09-67. Washington D.C.: October 24, 2008.
Federal Farm Programs: USDA Needs to Strengthen Management  Controls to Prevent Improper Payments to Estates and Deceased  Individuals. GAO-07-113T. Washington D.C.: July 24, 2007.
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 that Recipients Do Not Circumvent Payment  Limitations. GAO-04-407. Washington, D.C.: April 30, 2004.