Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent Payments to Individuals Who Exceed Income Eligibility Limits
Released: 2008-11-24T00:00:00

Letter

Background

Individuals can receive farm program payments through various programs linked to both their ownership interests and the amount and types of crops they produce. (App. III lists USDA farm programs and payments made between 2003 and 2006 under the 2002 Farm Bill.) Under the 2002 Farm Bill, a person could receive farm program payments directly or through as many as three entities in which the person held a substantial beneficial interest—defined as a 10 percent or more interest in the operation. For the purposes of the 2002 Farm Bill, a person was defined to include, among other things, an individual, partnership, trust, corporation, charitable organization, or state agency, who could receive payments (1) as an individual and as a member of no more than two entities or (2) through three entities and not as an individual. Under the 2002 Farm Bill, individuals and entities were required to be eligible under the AGI provision to receive certain USDA payments, including direct and counter- cyclical payments; payments under the Marketing Assistance Loan Program; and conservation payments. More specifically: Direct and Counter-Cyclical Payments Program provides two types of payments to producers of covered commodity crops, including corn, cotton, rice, soybeans, and wheat. Direct payments are tied to a fixed payment rate for each commodity crop and do not depend on current production or current market prices. Instead, direct payments are based on the farm’s historical acreage and yields. Counter-cyclical payments provide price-dependent benefits for covered commodities whenever the effective price for the commodity is less than a predetermined price (called the target price). Counter-cyclical payments are based on a farm’s historical acreage and yields, and are not tied to the current production of the covered commodity.

Marketing Assistance Loan Program provides benefits to producers of covered commodity crops when market prices are low. Specifically, the federal government accepts harvested crops as collateral for interest- bearing loans (marketing assistance loans) that are due in 9 months. When market prices drop below the loan rate (the loan price per pound or bushel), the government allows producers to repay the loan at a lower rate and retain ownership of their commodity for eventual sale. The difference between the loan rate and the lower repayment rate is called the marketing assistance loan gain. In addition, producers who do not have marketing assistance loans can receive a benefit when prices are low—the loan deficiency payment—that is equal to the marketing assistance loan gain that the producer would have received if the producer had had a loan. Under the 2002 Farm Bill, producers also could purchase commodity certificates that allowed them to redeem their marketing assistance loan at a lower repayment rate and immediately reclaim their commodities under the loan. The difference between the loan rate and the lower repayment rate, called the commodity certificate exchange gain, was not subject to the AGI provision.

Conservation payments provide assistance to producers to help them safeguard environmentally sensitive land. For example, the Conservation Reserve Program provides annual rental payments and cost-share assistance to producers who contractually agree to retire their land from agricultural purposes and keep it in approved conserving uses for 10 to 15 years. Other conservation programs include the Conservation Security Program, the Conservation Stewardship Program under the 2008 Farm Bill, Environmental Quality Incentives Program, Grassland Reserve Program, and the Wetlands Reserve Program, which are generally administered by the USDA’s Natural Resources Conservation Service.

The 2008 Farm Bill, which is in effect for crop years 2009 through 2012, continues many of the 2002 Farm Bill’s provisions, including the programs already subject to the AGI caps and programs that the 2008 Farm Bill added. However, the 2008 Farm Bill changes, among other things, the AGI cap by dividing it into two parts: non-farm income and farm income; both are averages over a 3-year period. The 2008 Farm Bill sets a cap of $500,000 for non-farm income for a person to receive crop subsidy benefits, noninsured crop assistance (financial assistance to producers for uninsurable specialty crops when low yields, loss of inventory, or prevented planting occurs due to natural disasters), or disaster payments, and sets a cap of $750,000 for farm income to receive direct payments. For conservation programs, the farm bill sets a cap of $1 million non-farm income, unless at least 66.66 percent of AGI is from farm income. The farm bill also provides USDA discretion to waive the conservation cap for “environmentally sensitive land of special significance.”

The 2008 Farm Bill also specifies types of income or benefits that must be included in determining farm income. These include the production of farm-based renewable energy; the sale of easements and development rights of farm, ranch, or forestry land, water or hunting rights, or environmental benefits; and the processing, storing, and transporting of farming, ranching, or forestry commodities, including renewable energy. The 2008 Farm Bill also requires the Secretary of Agriculture to conduct audits of persons and legal entities most likely to exceed the AGI caps. Furthermore, the new law requires persons and entities to provide the Secretary of Agriculture, at least once every 3 years, with either (1) information and documentation regarding AGI through procedures established by the Secretary, or (2) a certification by a certified public accountant or similar third party that the person or entity does not exceed applicable limitations. It also allows individuals filing joint tax returns to allocate their income and losses for purposes of applying for farm program payments, which may help them individually meet the AGI eligibility requirements even if applying jointly they could not. The 2008 Farm Bill creates the Average Crop Revenue Election Program, which provides producers with the option to participate in a state-level revenue protection system if they are willing to forgo counter-cyclical payments and receive a reduction in direct payments and the marketing assistance loan rate. Payments under this new program are subject to the AGI provisions.

To receive farm program payments under the 2002 and 2008 farm bills, an individual or entity must be “actively engaged in farming.” To be considered actively engaged in farming, an individual must make significant contributions to a farming operation in two areas: (1) capital, land, or equipment and (2) personal labor or active personal management. An entity is considered actively engaged in farming if the entity separately makes a significant contribution of capital, land, or equipment and its members collectively make a significant contribution of personal labor or active personal management.

The Improper Payments Information Act of 2002 (IPIA) requires the heads of executive branch agencies to annually review all programs and activities they administer, identify those that may be susceptible to significant improper payments, and estimate and report on the annual amount of improper payments in those programs and activities. IPIA defines an improper payment as any payment that should not have been made or was made in an incorrect amount, including any payment to an ineligible recipient.

Millions of Dollars in Farm Program Payments Went to Potentially Ineligible Individuals Because USDA Does Not Have Adequate Management Controls

USDA paid millions of dollars in farm program payments to individuals who were potentially ineligible for these benefits on the basis of their AGI, for 2003 through 2006. These payments occurred primarily because USDA does not have management controls, such as reviewing an appropriate sample of recipients’ tax returns, to verify that payments are going only to individuals who do not exceed the income eligibility caps.

USDA Made Millions of Dollars in Farm Payments to Potentially Ineligible Individuals from 2003 through 2006

We identified 2,702 individuals—out of the 1.8 million individuals receiving farm payments from 2003 through 2006—who were potentially ineligible for farm payments because they had a 3-year average AGI that exceeded $2.5 million and derived less than 75 percent of their income from farming, ranching, or forestry operations. Nevertheless, USDA paid over $49 million to these individuals. Table 1 shows the number of individuals who were potentially ineligible to receive farm program payments under the 2002 Farm Bill’s AGI provisions and the amount of farm program payments they received from 2003 through 2006. Furthermore, 427 of these individuals, or 16 percent, received potentially improper payments in each of the 4 years we reviewed.

Moreover, USDA should have known that 87 of these 2,702 individuals were ineligible for payments because it had noted in its own databases that these 87 individuals exceeded the income caps and therefore were ineligible to receive payments. These notations were based, in part, on individuals’ certifications that they did not meet the AGI provisions. USDA officials state that they relied on this information and could not explain why these 87 individuals received a payment in a year in which they had been properly identified as ineligible. As a result, we consider the payments to these individuals as improper.

Of the approximately $49 million in federal farm program payments to potentially ineligible individuals from 2003 to 2006, about $21 million went to individuals as members of entities. As we have previously reported, payments through entities have carried a higher risk of improper payments. Of the 2,702 individuals we identified as receiving potentially improper farm payments, about half—1,346—received these payments through entities, according to our analysis of USDA’s and IRS’s data. The remaining 1,356 individuals received payments directly from USDA. Table 2 shows the number of potentially ineligible individuals receiving farm program payments through entities, and the amount of the payments, from 2003 through 2006.

The following provides examples of potentially improper payments to the 2,702 individuals who received farm program payments but reported a 3- year average AGI that exceeded $2.5 million and derived less than 75 percent of their income from farming, ranching, or forestry operations and thus would generally not be eligible to receive the farm payments: A founder and former executive of an insurance company received a total of more than $300,000 in farm program payments in 2003, 2004, 2005, and 2006 that were subject to the AGI provisions.

An individual with ownership interest in a professional sports franchise received a total of more than $200,000 in farm program payments for 2003, 2004, 2005, and 2006 that were subject to the AGI provisions.

An individual residing in a country outside of the United States received farm payments totaling more than $80,000 for years 2003, 2005, and 2006 on the basis of the individual’s ownership interest in two farming entities.

A top executive of a major financial services firm received more than $60,000 in farm program payments in 2003. The individual received these payments directly, not through an entity.

A former executive of a technology company received about $20,000 in total farm program payments in years 2003, 2004, 2005, and 2006 that were subject to the AGI provisions. This individual also received more than $900,000 in farm program payments that were not subject to the AGI provisions.

In 2004, we reported that because USDA’s regulations ensuring that individuals are actively engaged in farming do not specify measurable standards for what constitutes a significant contribution of active personal management, they allow individuals with limited involvement in farming to qualify for farm program payments. For example, we found individuals who were members of a farming operation that received approximately $700,000 in farm program payments in 2001 who asserted to USDA that they provided personal management to the operation “on-site” and on a “daily” basis even though these individuals lived several hundred miles from the farming operation. We recommended that USDA develop and enforce a measurable standard that defines a significant contribution of active personal management. USDA agreed that it would be beneficial to have a measurable standard. However, to date, USDA has not taken any action on our recommendation, stating that its regulations are sufficient for determining active engagement in farming.

According to our analysis of addresses reported to the IRS by the 2,702 individuals, 9 reside outside of the United States—in Hong Kong, Saudi Arabia, and the United Kingdom, for example. The remainder resided in 49 of the 50 states, the District of Columbia, and the Virgin Islands. Five states—Arizona, California, Florida, Illinois, and Texas—account for 36 percent of the individuals and 43 percent of the $49.4 million in farm program payments. Furthermore, most of the 2,702 potentially ineligible individuals resided in or near a metropolitan area while the remaining individuals resided in small towns and rural areas. For example, according to addresses on tax returns for the potentially ineligible individuals from 2003 to 2006, 78 percent resided in or near a metropolitan area, including urban and suburban areas, while the remaining 22 percent resided in large towns, small towns, and rural areas. In contrast, for the 1.1 million individuals who received farm payments and filed a tax return in 2006, 36 percent resided in or near a metropolitan area and 64 percent resided in large towns, small towns, and rural areas.

Two programs accounted for 79 percent of the $49.4 million in potentially improper payments. Of the $49.4 million in farm payments, $39 million was paid under the Direct and Counter-Cyclical Payments Program and the Conservation Reserve Program. Figure 1 shows the percentage of the $49.4 million in potentially improper payments, by program, subject to the AGI caps for 2003 through 2006.

Of the 2,702 individuals who received potentially improper payments, 1,202 individuals also received about $16 million in payments that were not subject to the AGI provision, including commodity certificate exchange gains under the Marketing Assistance Loan Program, and certain crop disaster assistance payments and Livestock Compensation Program payments.

USDA Does Not Have Adequate Management Controls to Identify Potentially Ineligible High- Income Individuals

Payments to potentially ineligible high-income individuals have occurred because USDA does not have management controls, such as reviewing an appropriate sample of recipients’ tax returns, to verify that payments are going only to individuals who do not exceed the income eligibility caps. To determine compliance with farm program payment requirements, USDA has annually reviewed a sample of individuals receiving farm payments, but this review has assessed compliance with farm program eligibility requirements other than income—including the amount of payments a farming operation received in the prior year and whether it experienced a change in ownership. An individual’s income has not been a criterion in selecting the sample. Furthermore, as we reported in 2004, USDA staff conducts few reviews per office each year. For example, in one USDA field office we visited for this review, an official told us that of the 13 farming operations selected for a review in 2005—the most recent year completed at the time of our visit—USDA reviewed only 4. Reviews for the remaining 9 farming operations were waived because they had been reviewed in a previous year. Because USDA has drawn a sample of individuals receiving farm payments that has not routinely tested for income eligibility, it could not ensure that only individuals who have not exceeded the income eligibility caps were receiving farm payments. However, in the 2008 Farm Bill, Congress directed the Secretary of Agriculture to establish statistically valid procedures to conduct targeted audits of persons or legal entities most likely to exceed the legislation’s income eligibility caps.

Our analysis of USDA and IRS data suggests that USDA’s primary method for ensuring compliance—its annual review of a sample of individuals— has not always identified or prevented payments to individuals who were not eligible under the AGI requirement. According to USDA officials, the agency has relied principally on individuals’ one-time self-certifications that they have not exceeded income eligibility caps and that they would notify the agency of any changes that caused them to exceed these caps. Officials in USDA’s Mississippi state office noted that producers who believe their average income may exceed the AGI provision generally contact their local USDA field office to discuss options. However, the Mississippi officials also noted that it is rare for a producer to exceed the 2002 Farm Bill’s $2.5 million AGI threshold. According to these and other USDA officials, resource constraints that hamper USDA’s ability to examine complex tax and financial information contribute to USDA’s inability to verify that each individual who receives farm program payments were eligible under the AGI provision. Furthermore, USDA headquarters officials noted that the need to collect and safeguard individuals’ tax information, as well as field staffs’ competing responsibilities, places constraints on USDA’s ability to verify compliance with the AGI provision.

USDA headquarters officials also told us that computer matching of its farm payment data with IRS tax filer data, as we did in our analysis, would help USDA identify individuals who may not be in compliance with the AGI provisions. We realize that under Internal Revenue Code Section 6103, IRS is generally not authorized to provide USDA with tax filer information for such purposes without a waiver from the individual tax filer. Individual tax filers may authorize IRS, in writing, to disclose their return information to a third party. USDA told us that it had not yet explored the possibility of requiring farm program payment recipients to provide such waivers authorizing IRS to share tax information with USDA.

2008 Farm Bill Increases the Number of Individuals Likely Affected by the AGI Cap

Because of lower income eligibility caps under the 2008 Farm Bill, the number of individuals whose AGI exceeds the caps will likely rise, increasing the risk that USDA could make improper payments to more individuals. As many as 23,506 individuals are likely to have incomes above the new AGI cap of $500,000 for average non-farm income, according to our analysis of the AGI provisions in the 2008 Farm Bill and 2006 tax returns for individuals receiving farm program payments. Table 3 shows the range of individuals receiving farm program payments in 2006 who potentially would have been ineligible for these payments if the 2008 Farm Bill’s AGI provisions had been in effect as well as the range of the potentially ineligible farm payments, according to our analysis of data from USDA and the individuals’ tax returns, including their Form 1040, Schedule F, and Form 4835. See appendix I for details on the methodology used to determine these ranges.

Several factors may influence the actual number of individuals affected by the new AGI provisions. According to an official with USDA’s Economic Research Service, some individuals with high income might make business decisions that, while legal, would help them avoid the new AGI caps. These decisions include leasing all or part of their land to individuals not affected by the caps, and then indirectly receiving farm program payments by charging a rental rate that includes the lost payments; dividing income with a spouse for individuals who are married and file a joint tax return; investing in equipment to increase tax deductions for depreciation and immediate expensing; and delaying or accelerating income from corporations in which the individual has controlling interest. Furthermore, while forecasts for high crop prices through 2012 might increase individuals’ farm income and AGI, an increase in the tax deduction for “domestic production activities” beginning in 2010 might reduce the impact of the AGI provisions on some individuals. The 2008 Farm Bill’s directive to include the production of farm-based renewable energy, production of livestock products, and the sale of farm equipment in the definition of farm income might increase the number of individuals ineligible for direct payments under the Direct and Counter-Cyclical Payments Program.

In discussing the 2008 Farm Bill with USDA officials, they agreed that the lower income eligibility thresholds will increase and complicate their responsibilities. In particular, with the expanded definition of farm income, field office staff no longer will be able to rely primarily on an individual’s IRS Schedule F to determine farm income. Rather, other IRS forms and schedules not used previously may now be included in USDA’s eligibility determination. The USDA officials also stated that the split of AGI into two types of income—farm and non-farm—together with separate income caps for direct payments, crop subsidy and disaster assistance payments, and conservation payments, adds to the complexity for field office staff who must make eligibility determinations. In July 2008, USDA published a notice in the Federal Register to provide additional implementation information.

Individuals Who Receive Farm Program Payments Generally Report Higher Incomes Than All Tax Filers

Individuals participating in farm programs are three times more likely to have an AGI exceeding $500,000 than all individuals who file taxes. We found that 21 of every 1,000 individuals receiving farm payments reported an AGI exceeding $500,000 in 2006 while only 7 of every 1,000 of all individual tax filers reported income at this level or higher. Furthermore, as figure 2 shows, 12 of every 1,000 individuals receiving farm program payments reported AGI between $500,000 and $1 million compared with about 4 of all tax filers who reported income at this level.

Of the individuals who received farm program payments and filed a tax return in 2006, 9,651 reported an AGI exceeding $1 million and 22,931 reported an AGI exceeding $500,000. Individuals who participate in farm programs also are over three times more likely to report a loss, that is, negative AGI, than individuals who do not participate in farm programs. Nearly 7 percent of individuals receiving farm payments reported no AGI (that is, income of $0 or less), compared with only 1.9 percent of all tax filers who reported no AGI. Individuals with no AGI received farm program payments averaging $17,200, the highest average farm payment among AGI ranges we analyzed. Conversely, average farm program payments range from about $9,000 to $14,000 for individuals in the six groups with an AGI exceeding $500,000. (App. IV provides a detailed distribution of income of individuals receiving farm program payments for all AGI ranges and the amount of farm payments, as well as the income distribution for all tax filers.)

Conclusions

Thousands of individuals who may not have met the income eligibility requirements under the 2002 Farm Bill nevertheless received payments, making the payments potentially improper. The likelihood that even more individuals will exceed income eligibility requirements and still receive payments is expected to grow under the 2008 Farm Bill given the bill’s new, more complex eligibility criteria.

In the past, USDA has relied on individuals’ one-time self-certifications that they meet income eligibility requirements and their promise to notify USDA if they no longer meet these requirements. As our analysis showed, however, these self-certifications have not always proven reliable for all recipients of farm program payments because USDA has not always withheld payments from these individuals. Moreover, USDA’s principal management control to ensure compliance with farm program requirements—a review of a sample of individuals receiving high payments or a change in operations—has not targeted high-income individuals. The need for management controls to ensure individuals meet income eligibility requirements will be even more critical under the 2008 Farm Bill, which has provided reduced income eligibility caps for farm program payments.

The 2008 Farm Bill directs USDA to establish statistically valid procedures to conduct targeted audits of persons and legal entities that are most likely to exceed the income eligibility caps. We realize that under Internal Revenue Code Section 6103, IRS is generally not authorized to provide USDA with tax filer information for such purposes without a waiver from the individual tax filer. Individual tax filers may authorize IRS, in writing, to disclose their return information to a third party. USDA told us that it had not yet explored the possibility of requiring farm program payment recipients to provide such waivers authorizing IRS to share tax information with USDA. Such efforts could help better ensure that program funds benefit those engaged in farming as intended.

Recommendations for Executive Action

To provide greater assurance of program integrity, we recommend that the Secretary of Agriculture direct the Administrator of the Farm Service Agency to work with the Internal Revenue Service to develop a system for verifying the income eligibility for all recipients of farm program payments. If the Secretary determines that it does not have the authority to develop such a system with the Commissioner of the Internal Revenue Service, we recommend that the Secretary request this authority from Congress, as appropriate.

Agency Comments and Our Evaluation

We provided USDA with a draft of this report for review and comment. USDA agreed with our recommendations. Nevertheless, USDA did not agree with several of our findings. First, USDA noted that only a small percentage of USDA’s total farm program payments were made to individuals who exceeded the 2002 Farm Bill’s income eligibility caps. However, our finding is consistent with the general distribution of income among all tax filers: only a very small percentage of all individuals who file a tax return report an AGI in excess of $2.5 million to the IRS. Furthermore, the number of individuals who exceed income eligibility caps is likely to increase because the 2008 Farm Bill lowers these eligibility caps. Therefore, USDA could be at greater risk of making improper payments unless it has better management controls in place.

Second, USDA stated that we should not have discussed the requirement of actively engaged in farming in this report. We disagree. We believe that it is important to place our discussion of income eligibility requirements in the context of other key eligibility requirements to provide a more comprehensive understanding of the conditions under which individuals may qualify for farm program payments.

Finally, USDA sought more information about the individual cases we cite in this report of individuals whose AGI apparently exceeds the eligibility requirements. However, Internal Revenue Code Section 6103 prohibits us from disclosing any additional information.

USDA also provided technical corrections, which we have incorporated into this report as appropriate. USDA’s written comments and our responses are presented in appendix II.

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Appendix I: Objectives, Scope, and Methodology

At the request of the Ranking Member of the Senate Committee on Finance, we reviewed the Farm Service Agency’s (FSA) implementation of adjusted gross income (AGI) provisions under the Farm Security and Rural Investment Act of 2002 (2002 Farm Bill) to identify potentially improper payments to individuals with high incomes. In this context, we were asked to evaluate (1) how effectively the U.S. Department of Agriculture (USDA) implemented provisions under the 2002 Farm Bill that prohibited payments to individuals whose 3-year average AGI exceeded $2.5 million and who derived less than 75 percent of that income from farming, ranching, or forestry operations; (2) the potential impact of the Food, Conservation, and Energy Act of 2008’s (2008 Farm Bill) AGI provisions on individuals who receive farm program payments; and (3) the distribution of income for individuals receiving farm program payments compared with all tax filers.

To evaluate how effectively USDA implemented the 2002 Farm Bill provisions that prohibit payments to individuals who do not meet the AGI provisions, we reviewed guidance that USDA field offices use to determine farm program payment eligibility, including relevant statutes and regulations and agency policy, such as the FSA Handbook on Payment Limitations, 1-PL (Revision 1), as well as relevant studies prepared by USDA’s Office of Inspector General and the Congressional Research Service and our own past reports. In addition, we spoke with USDA officials in headquarters and state and local field offices in Louisiana and Mississippi who are responsible for ensuring that individuals who receive farm program payments were eligible under the 2002 Farm Bill’s AGI provisions that cap 3-year average AGI at $2.5 million, unless at least 75 percent is derived from farming, ranching, or forestry operations. We selected these offices to provide an example of how USDA implements the AGI provisions and the information we obtained cannot be generalized to all field offices. We also spoke with officials from USDA’s Economic Research Service on the implications of AGI provisions in the 2008 Farm Bill for individuals who receive farm program payments. We also reviewed USDA’s FY 2007 Performance and Accountability Report to understand its assessment of internal controls for its farm programs, and Internal Revenue Service (IRS) publications and guidance on reporting income.

We obtained and analyzed USDA’s computer databases for information on individuals receiving farm program payments either directly or through an entity, such as a corporation, general partnership, or trust, from 2003 through 2006. These databases included FSA’s Producer Payment Reporting System, Permitted Entity file, and Subsidiary Eligibility file, as well as payment files from USDA’s Natural Resources Conservation Service. These databases contained detailed information on payment recipients, such as social security numbers, payment amounts, the status of recipients as individuals or members of entities, their ownership interest in entities, types of entities, and additional organizational details. These databases also contained information on payments made under USDA’s farm programs, including the Direct and Counter-Cyclical Payments Program, Marketing Assistance Loan Program, Conservation Reserve Program, and Environmental Quality Incentives Program. Appendix III provides a listing of USDA farm programs and payments made between 2003 and 2006 under the 2002 Farm Bill.

Using the USDA data described above, we identified approximately 2.6 million individuals who received farm payments between 2003 and 2006. We forwarded the list to IRS and requested that IRS provide selected data from Form 1040 (U.S. Individual Income Tax Return), Schedule F (Profit or Loss from Farming), and Form 4835 (Farm Rental Income and Expenses)—the principal IRS forms for reporting income from farming, ranching, or forestry. IRS returned data for about 10.9 million returns for tax years 2000 to 2006. We verified the accuracy of the matched records through an automated name check to compare the individual’s name as contained in the USDA data with the name of the tax payer in the IRS data. In addition to the automated name comparison, we reviewed every name that failed the check to confirm that the two names did not match. We did not analyze tax filer data reported by entities, such as corporations, partnerships, or trusts, but we did review tax filer data for the individuals identified by USDA as members of an entity. At the conclusion of our verification efforts, tax returns from about 1.9 million of the original 2.6 million individuals were validated.

To determine the number of individuals who received potentially improper farm program payments, we calculated 3-year moving averages of AGI and farm income, and identified individuals whose average AGI was at least $2.5 million for the 3 years immediately proceeding the year in which they received a farm program payment. This analysis identified 3,893 individuals whose tax returns indicated they did not meet the AGI provisions for receiving farm program payments in one or more of years 2003 to 2006. We matched these 3,893 individuals with the data provided by USDA to determine the types and amounts of farm program payments these individuals received in each year. Our analyses showed that 2,702 individuals had AGI that exceeded the income eligibility cap and had received potentially improper farm program payments. For payments made to an entity, we attributed the payments to each member based on the payment share of the member as recorded in FSA’s Permitted Entity file.

We also identified the amount of certain program payments and benefits not subject to the income provision for the 2,702 individuals. Payments and benefits not subject to the AGI provisions of the 2002 Farm Bill include those provided under the 2002 Cattle Feed Program, Conservation Reserve Program (annual rental and incentive payments for contracts signed prior to May 13, 2002), Florida hurricane disaster programs (payments for debris removal), Marketing Assistance Loan Program (commodity certificate exchange gains), Noninsured Assistance Program, Peanut Quota Buyout Program, and Sugar Beet Disaster Program. We identified programs not subject to the AGI provisions with the assistance of FSA officials.

To evaluate the potential impact of the 2008 Farm Bill’s AGI provisions on individuals who receive farm program payments, we identified 1.7 million individuals who received farm payments in 2006 and matched these individuals with 2006 data provided by IRS. After completing our name validation tests, we identified 1.1 million tax returns for individuals receiving farm payments in 2006. We categorized tax returns for these 1.1 million individuals by the 2008 Farm Bill’s farm and non-farm income caps for direct payments, crop subsidy and disaster payments, and conservation program payments—$750,000, $500,000, and $1 million, respectively. For individuals who received conservation program payments, we also compared their farm income with their AGI to determine if at least 66.66 percent of their average AGI was derived from farm income. To estimate non-farm income, we calculated the difference between reported AGI and farm income for each tax return.

For joint tax returns, we assumed that the difference between the AGI and farm income (Schedule F and Form 4835) represented non-farm income. However, because individuals filing joint tax returns represented 70.5 percent of the 1.1 million returns for all individuals, we performed additional steps for joint tax returns to account for the possibility that a secondary filer on a joint tax return could have income that may be categorized as either farm income, non-farm income, or both. Using the 2006 data, we developed 11 different scenarios to estimate the potential impact of the 2008 Farm Bill’s AGI provisions on tax returns from individuals who receive farm program payments. These scenarios included non-farm income as values from 0 percent to 100 percent of the difference between AGI and farm income, using 10 percent increments. Table 4 provides the results of our calculations for individuals whose tax filing status was single or married filing jointly. For example, the table shows that 3,594 individuals filing single tax returns and as many as 19,912 individuals filing joint tax returns, or a total of 23,506, are likely to have incomes above the new AGI cap of $500,000 for non-farm income.

To evaluate the distribution of income of the 1.1 million individuals who received farm program payments and filed a tax return in 2006, we stratified these individuals by the amount of their AGI. We then identified average farm program payments for each of these categories and calculated the farm payment income as a percent of AGI. We compared the income distribution for farm program payment recipients with the income distribution for all individual tax filers in 2006, the latest year for which data were available. Information for all tax filers is based on IRS’s Statistics of Income data.

For our analyses of IRS’s and USDA’s data, we performed consistency checks to confirm that the data contained the information required for our comparisons. We eliminated duplicate records from both the USDA and IRS data and ensured the internal consistency of the data by deleting any cases with missing values critical for the analysis. When we matched USDA records with IRS records, we confirmed that the USDA and IRS records represented an accurate match through our automated name verification check followed by the visual inspection for each failed match. Only those individuals with farm income reported to the IRS who also received farm payments were included in the analysis. Accordingly, we believe the data we used in the analyses were sufficiently reliable for our purposes. We did not independently verify the data from USDA’s and IRS’s computer databases, but we discussed with agency officials, as appropriate, the measures they take to ensure the accuracy of these data. For the purposes for which the data were used in this report, these measures seemed reasonable.

We conducted this performance audit from August 2007 through September 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Comments from the U.S. Department of Agriculture

The following is GAO’s response to the U.S. Department of Agriculture’s letter dated October 9, 2008.

GAO’s Comments

1. The report number has changed to GAO-09-67. 2. We recognized in the report that resource constraints limit USDA’s ability to effectively enforce the adjusted gross income (AGI) requirements. As we stated, according to USDA officials, these resource constraints hamper the department’s ability to examine complex tax and financial information, and field staff have other competing responsibilities that limit the time available for enforcing the AGI requirements. 3. We acknowledge that a small percentage of USDA’s total farm program payments were made to individuals who exceeded the 2002 Farm Bill’s income eligibility caps. The small percentage is to be expected: only a very small percentage of all individuals who file a tax return report an AGI exceeding $2.5 million to the IRS. Furthermore, the fact that only a small percentage of recipients are potentially ineligible does not relieve USDA of its responsibility to enforce the AGI requirements. This percentage is also likely to increase because the 2008 Farm Bill lowers the income eligibility caps. Therefore, USDA will be at greater risk of making improper payments to more than the 2,702 individuals we found unless it has better management controls in place.

USDA is correct in stating that not all of the farm programs and payments listed in appendix III of this report were subject to the AGI limitation under the 2002 Farm Bill. That table was not intended to list only programs subject to the AGI limitation. To provide clarity, we have included a note below the table in appendix III explaining this fact. 4. We believe that it is important to place our discussion of income eligibility requirements in the context of other key eligibility requirements to provide a more comprehensive understanding of the conditions under which individuals may receive farm program payments. Although USDA is correct that the requirements for actively engaged in farming are not part of the AGI provision, we mention the issue of actively engaged in farming in this report to provide more information regarding concerns we have previously raised about USDA’s oversight of farm program payments. 5. As noted in the report, the 2008 Farm Bill directed the Secretary of Agriculture to establish statistically valid procedures to conduct targeted audits of persons or entities most likely to exceed the legislation’s income eligibility caps. Therefore, to provide context for our discussion on how USDA ensured recipients met eligibility requirements, we provided information regarding concerns we had previously raised in our 2004 report about how USDA selected farm operations for compliance review. 6. USDA is correct in stating that when the entity is AGI compliant and an interest holder is not AGI compliant, the entity is still eligible to receive a payment. However, the payment to the entity must be reduced by the share held by that interest holder. In our analysis of entities, we attributed payments to each interest holder based on the payment share of the interest holder as recorded in the Farm Service Agency’s Permitted Entity database. For the 1,346 potentially ineligible individuals who we identify as receiving a payment through an entity, USDA did not reduce the payment to the entity based on the share held by the individual. (For further discussion of the methodology we used, see app. I.) 7. We have identified potentially ineligible recipients on the basis of their reported AGI. While we cannot name these recipients, we believe that providing as much demographic information as we can about these recipients, such as whether they reside near the farming operation, is helpful to users of this report. 8. USDA believes we should provide more information about the examples we cite in this report. Providing this information would allow USDA, which does not have authority to access tax information, to identify individual filers. Internal Revenue Code Section 6103 prohibits us from disclosing any additional information. We note here that some of the payments were issued directly to individuals while others were issued indirectly through entities. Regarding USDA’s comment on whether we made a commensurate reduction in the payment when the payment was made to an entity, we attributed payments to each interest holder based on the payment share of the interest holder as recorded in the Farm Service Agency’s Permitted Entity database. With respect to USDA’s comment on requesting authority to gain access to information on potentially improper payments, we recommended that the Secretary of Agriculture direct the Administrator of the Farm Service Agency to work with the Internal Revenue Service to develop a system for verifying the income eligibility for all recipients of farm program payments. We further stated that if the Secretary determines that it does not have the authority to develop such a system with the Commissioner of the Internal Revenue Service, we recommended that the Secretary request this authority from Congress, as appropriate. 9. We believe that explaining our use of the term “potentially improper payments” in the footnotes on pages 4 and 25 is sufficient. 10. Appendix I of this report specifies the documents we reviewed. As we noted, we reviewed guidance that USDA field offices use to determine compliance with the AGI requirements, including relevant statutes and regulations and agency policy and guidance. We believe that the intent of the AGI eligibility requirement is clear in the 2002 Farm Bill.

Appendix III: U.S. Department of Agriculture Farm Program Payments by Program or Payment Type, Fiscal Years 2003-2006

Appendix III: U.S. Department of Agriculture Farm Program Payments by Program or Payment Type, Fiscal Years 2003-2006 (41,485) (148,398) (463,156)

532,968,808 (1,569) (341) (292,867,811) (8,828,137) (2,663,318) (248,116) (304,607,382) $15,913,996,321 $11,466,729,077 $20,237,646,107 Includes cotton user marketing certificate gains.

Includes the Apple and Potato Quality Loss Program, Apple Market Loss Assistance Program, Sugar Beet Disaster Program, Quality Loss Program, Crop Loss Disaster Assistance Program, Florida Hurricane Citrus Disaster Program, Crop Hurricane Damage Program, Hurricane Indemnity Program, Florida Hurricane Nursery Disaster Program, Florida Hurricane Vegetable Disaster Program, Multi- Year Crop Loss Disaster Assistance Program, and Single Year Crop Loss Disaster Assistance Program, as well as Crop Disaster North Carolina payments, Crop Disaster Virginia payments, and Florida Nursery Loss payments.

Includes the Dairy Indemnity Program, Dairy Options Pilot Program, and Dairy Market Loss Assistance Program.

Includes the Environmental Quality Incentives Program and the Automated Conservation Program Environmental Long Term payments.

Includes the Livestock Assistance Program, Livestock Indemnity Program, Avian Influenza Indemnity Program, 2002 Cattle Feed Program, Pasture Flood Compensation Program, and Pasture Recovery Program.

Includes the Acreage Grazing Payments Program.

Includes supplemental appropriations for the Noninsured Assistance Program.

Includes the Tobacco Loss Assistance Program and Supplement Tobacco Loss Assistance Program.

Includes market loss assistance payments and production flexibility contract payments.

Includes the Agricultural Conservation Program, Oilseed Payment Program including supplemental appropriations for the Oilseed Payment Program, Wool and Mohair Market Loss Assistance Program, Yakima Basin Water Program, Idaho Oust Program, Livestock Compensation Program–Grants For Catfish Producers, Annual Agreement for Agricultural Conservation Program payments, Extra-long Staple Cotton Special Provision Program, Farm Storage Facility Loans, Finality Rule and Equitable Relief, New Mexico Tebuthiuron Application Losses Program, Aquaculture Block Grant, Tree Indemnity Program, Loan Deficiency Payments for Non-Contract Production Flexibility Contract Growers, Milk Marketing Fee, Tri-Valley Growers Program, New York Onion Producers Program, Market Loss Onion Producer Program, and Interest payments.

Appendix IV: Distribution of Income for Individuals Receiving Farm Program Payments Compared with All Tax Filers, 2006

Tax returns for individuals receiving

Average adjusted gross income per per return (Dollars in per return(Dollars in thousands) thousands) thousands) $(90.1)

Average adjusted gross income per per return (Dollars in per return(Dollars in thousands) thousands)

Appendix V: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the individual named above, Thomas M. Cook, Assistant Director; Kevin S. Bray; Arthur L. James, Jr.; James R. Jones, Jr.; Leslie V. Mahagan; Grant M. Mallie; Carol Herrnstadt Shulman; Tyra J. Thompson; and James J. Ungvarsky made key contributions to this report.

Related GAO Products

Improper Payments: Agencies’ Efforts to Address Improper Payment and Recovery Auditing Requirements Continue. GAO-08-438T. Washington, D.C.: January 31, 2008.

Federal Farm Programs: USDA Needs to Strengthen Management Controls to Prevent Improper Payments to Estates and Deceased Individuals. GAO-07-1137T. Washington, D.C.: July 24, 2007.

Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent Improper Payments to Estates and Deceased Individuals. GAO-07-818. Washington, D.C.: July 9, 2007.

Improper Payments: Agencies’ Efforts to Address Improper Payment and Recovery Auditing Requirements Continue. GAO-07-635T. Washington, D.C.: March 29, 2007.

Improper Payments: Incomplete Reporting under the Improper Payments Information Act Masks the Extent of the Problem. GAO-07-254T. Washington, D.C.: December 5, 2006.

Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. Washington, D.C.: November 17, 2006.

Improper Payments: Agencies’ Fiscal Year 2005 Reporting under the Improper Payments Information Act Remains Incomplete. GAO-07-92. Washington, D.C.: November 14, 2006.

Financial Management: Challenges Continue in Meeting Requirements of the Improper Payments Information Act. GAO-06-581T. Washington, D.C.: April 5, 2006.

Taxpayer Information: Data Sharing and Analysis May Enhance Tax Compliance and Improve Immigration Eligibility Decisions. GAO-04-972T. Washington, DC.: July 21, 2004.

Farm Program Payments: USDA Should Correct Weaknesses in Regulations and Oversight to Better Ensure Recipients Do Not Circumvent Payment Limitations. GAO-04-861T. Washington, D.C.: June 16, 2004.

Farm Program Payments: USDA Needs to Strengthen Regulations and Oversight to Better Ensure Recipients Do Not Circumvent Payment Limitations. GAO-04-407. Washington, D.C.: April 30, 2004.