Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent Improper Payments to Estates and Deceased Individuals
Released: 2007-07-23T00:00:00

Letter

Background

FSA provides benefits through various programs of the Farm Security and Rural Investment Act of 2002. Appendix III provides a listing of USDA farm programs and payments made from 1999 through 2005. The three- entity rule applies to certain USDA payments, including direct and counter-cyclical payments; loan deficiency payments and marketing loan gains, under the Marketing Assistance Loan Program; and Conservation Reserve Program payments.

Direct and Counter-Cyclical Payments Program provides two types of payments to producers of covered commodity crops, including corn, cotton, rice, soybeans, and wheat. Direct payments (formerly known as production flexibility contract payments) are tied to a fixed payment rate for each commodity crop and do not depend on current production or current market prices. Instead, direct payments are based on the farm’s historical acreage and yields. Counter-cyclical payments provide price- dependent benefits for covered commodities whenever the effective price for the commodity is less than a pre-determined price (called the target price). Counter-cyclical payments are based on a farm’s historical acreage and yields, and are not tied to the current production of the covered commodity.

Marketing Assistance Loan Program (formerly known as the Commodity Loan Program) provides benefits to producers of covered commodity crops when market prices are low. Specifically, the federal government accepts harvested crops as collateral for interest-bearing loans (marketing assistance loans) that are due in 9 months. When market prices drop below the loan rate (the loan price per pound or bushel), the government allows farmers to repay the loan at a lower rate and retain ownership of their commodity for eventual sale. The difference between the loan rate and the lower repayment rate is called the marketing assistance loan gain. In lieu of repaying the loan, farmers may forfeit their crops to the government when the loan matures and keep the loan principal. In addition, farmers who do not have marketing assistance loans can receive a benefit when prices are low—the loan deficiency payment— that is equal to the marketing assistance loan gain that the farmer would have received if the farmer had a loan. Finally, farmers can purchase commodity certificates that allow them to redeem their marketing assistance loan at a lower repayment rate and immediately reclaim their commodities under loan. The difference between the loan rate and the lower repayment rate is called the commodity certificate gain.

Conservation Reserve Program provides annual rental payments and cost- share assistance to producers to help them safeguard environmentally sensitive land. Producers must contractually agree to retire their land from agricultural purposes and keep it in approved conserving uses for 10 to 15 years.

Most farmers receive farm program payments directly from FSA as an individual operator. However, some farmers use legal entities to organize their farming operations to reduce their exposure to financial liabilities or estate taxes or, in some cases, to increase their potential for farm benefits.

Some of the more common ways farmers organize their operations include the following: Corporations have a separate legal existence from their owners; that is, the corporation, rather than the owners, is ordinarily responsible for farm business debts and can be sued. As a result, some individuals may incorporate their farm to protect their personal assets.

General partnerships are a simple arrangement of two or more partners— individuals or entities—that do business together. Partners are personally liable for their own conduct and for the conduct of those under their direct supervision, as well as for negligence, wrongful acts, and misconduct of other partners and partnership employees. Partners are also personally liable for the partnership’s commercial obligations, such as loans or taxes.

Joint ventures are two or more individuals who pool resources and share profits or losses. Joint ventures have no legal existence independent of their owners. Members in a joint venture are personally liable for the farm’s debts.

Limited partnerships are an arrangement of two or more partners whose liability for partnership financial obligations is only as great as the amount of their investment. A limited partnership must have at least one general partner who manages the farm business and who is fully liable for partnership financial obligations to be considered eligible for farm program payments.

Trusts (irrevocable and revocable) are arrangements generally used in estate planning that provide for the management and distribution of property. A revocable trust is amendable by the grantor during his or her lifetime who may also be the trustee and beneficiary. An irrevocable trust is an arrangement in which the grantor departs with ownership and control of property.

Other types of entities that may qualify for farm program payments under payment limitation rules include a limited liability company—a hybrid form of a business entity with the limited liability feature of a corporation and the income tax treatment of a general partnership; a charitable organization; and a state or political subdivision.

FSA is responsible for ensuring that recipients meet payment eligibility criteria and do not receive payments that exceed the established limitations. It carries out this responsibility through its headquarters office, 50 state offices, and over 2,300 field offices.

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

OMB defines significant improper payments as payments in any particular program that exceed both 2.5 percent of total program payments and $10 million annually. If a program’s estimated improper payments exceed $10 million in a year, IPIA and related OMB guidance requires agencies to prepare and implement a plan to reduce improper payments and report actions taken. Agencies are required to report this information, among other things, annually in their Performance and Accountability Reports. Specifically, OMB guidance requires agencies to report on (1) the causes of improper payments and corrective actions, (2) the steps the agency has undertaken to ensure that agency managers are held accountable for reducing and recovering erroneous payments, along with a realistic timetable, and (3) any statutory or regulatory barriers that may limit the agency’s corrective actions in reducing improper payments. In November 2006, we reported that federal agencies, including USDA, need to improve their reporting of improper payments under IPIA by better identifying programs susceptible to improper payments and improving statistical sampling methodologies to estimate improper payments made.

Because Many FSA Field Offices Do Not Systematically Determine the Eligibility of Estates for Farm Program Payments, FSA Cannot Be Assured That Payments Are Proper

While there are legitimate reasons for keeping estates open, we found that FSA field offices do not systematically determine the eligibility of all estates that have been kept open for more than 2 years, as regulations require, and when they do conduct eligibility determinations, the quality of the determinations varies. Without performing annual determinations, an essential management control, FSA cannot identify estates being kept open primarily for the purpose of receiving these payments and be assured that the payments are proper.

We identified weaknesses in FSA’s eligibility determinations for 142 of the 181 estates we reviewed. In particular, FSA did not conduct any program eligibility determinations for 73, or 40 percent, of estates that required a determination from 1999 through 2005. Because FSA did not conduct the required determinations, the extent to which estates remained open for reasons other than for obtaining program payments is not known. Sixteen of these 73 estates received more than $200,000 in farm program payments and 4 received more than $500,000 during this period. In addition, 22 of the 73 estates had received no eligibility determinations during the 7-year period we reviewed, and these estates had been open and receiving payments for more than 10 years. In one case, we found that the estate has been open since 1973. The following provides examples of estates that received farm program payments but were not reviewed for eligibility by FSA: A North Dakota estate received farm program payments totaling $741,000 from 1999 through 2003, but FSA did not conduct the required determinations.

An Alabama estate received payments totaling $567,000 from 1999 through 2005, but FSA did not conduct the required determinations. In this case, the estate has been open since 1981.

Two estates in Georgia, open since 1989 and 1996, respectively, received payments totaling more than $330,000 each, from 1999 through 2005. Neither estate received the required determinations for any of the years we reviewed.

An estate in New Mexico, open since 1991, received $320,000 from 1999 through 2005, but it did not receive any of the required determinations.

According to FSA field officials, many determinations were either not done or not done thoroughly, in part because of a lack of sufficient personnel and time, as well as competing priorities for carrying out farm programs. However, FSA’s failure to conduct appropriate eligibility determinations means that it has no assurance that it is not making farm program payments to estates that have been kept open primarily to receive these payments.

Even when FSA field offices determined estates’ eligibility for continued farm program payments, they did not always do so consistently. For the remaining 108 estates, 39 had eligibility determinations every year that a determination was required, while 69 had determinations at least once between 1999 and 2005, but not with the frequency required by regulations. Table 1 shows the number of years for which estates in our sample were required to have annual eligibility determinations compared with the number of years that FSA actually conducted determinations. The dark shaded numbers highlight the number of estates that received all the required annual eligibility determinations for the years that the estate received farm program payments—a total of 39 estates.

As the table shows, the longer an estate was kept open, the fewer determinations it received. For example, only 2 of the 36 estates requiring a determination every year over the 7-year period received all seven required determinations.

According to FSA guidelines, an estate should provide evidence that it is still making required reports to the court to be eligible for farm program payments. However, we found that FSA sometimes approved eligibility for payments when the estate had provided insufficient information—that is, information that was either nonexistent or vague. For example, in 20 of the 108 determinations, the minutes of FSA county committee meetings indicated approval of eligibility for payments to estates, but the associated files did not contain any documents that explained why the estate remained active. FSA also approved eligibility on the basis of insufficient explanations for keeping the estate open. In five cases, executors explained that they did not want to close the estate but did not explain why. In a sixth case, documentation stated that the estate was remaining active upon the advice of its lawyers and accountants, but did not explain why.

Furthermore, some FSA field offices approved program payments to groups of estates that were kept open after 2 years without any apparent review. In one case in Georgia, minutes of an FSA county committee meeting listed 107 estates as eligible for payments by stating that the county committee approved all estates open over 2 years. Two of the estates on this list of 107 were part of the sample that we reviewed in detail. In addition, another 10 estates in our sample, from nine different FSA field offices, were also approved for payments without any indication that even a cursory review had been conducted.

Additionally, the extent to which FSA field offices make eligibility determinations varies from state to state, which suggests that FSA is not consistently implementing its eligibility rules. Overall, FSA field offices in 16 of the 26 states we reviewed made less than one-half of the required determinations of their estates. For example, in Alabama and in Georgia, FSA field offices made only 22 percent and 31 percent of the required determinations for estates, respectively, compared with FSA field offices in Kansas and Texas, which made 62 percent and 87 percent of the required determinations, respectively. Table 2 shows, for the 181 estates in our sample, the variation in FSA’s conduct of eligibility reviews from 1999 through 2005 in states that had five or more estates to examine. Appendix IV shows the extent to which FSA conducted estate eligibility determinations in each state in our review.

Under the three-entity rule, individuals receiving program payments may not hold a substantial beneficial interest in more than two entities also receiving payments. However, because a beneficiary of an Arkansas estate we reviewed received farm program payments through the estate in 2005, as well as through three other entities, the beneficiary was able to receive payments beyond what the three-entity rule would have allowed. FSA was unaware of this situation until we brought it to officials’ attention, and FSA has begun taking steps to recover any improper payments. Had FSA conducted any eligibility determinations for this estate during the period, it might have determined that the estate was not eligible for these payments, preventing the beneficiary from receiving what amounted to a payment through a fourth entity.

We informed FSA of the problems we uncovered during the course of our review. According to FSA field officials, a lack of sufficient personnel and time, and competing priorities for carrying out farm programs explain, in part, why many determinations were either not conducted or not conducted thoroughly. Nevertheless, officials told us that they would investigate these cases for potential receipt of improper payments and would start collection proceedings if they found improper payments.

Because FSA Does Not Have Appropriate Management Controls, It Cannot Be Assured That It Is Not Making Payments to Deceased Individuals

FSA cannot be assured that millions of dollars in farm program payments it made to thousands of deceased individuals from fiscal years 1999 through 2005 were proper because FSA does not have appropriate management controls, such as computer matching, to verify that it is not making payments to deceased individuals. For example, FSA is not matching recipients listed in its payment database with individuals listed as deceased in the Social Security Administration’s Death Master File. In addition, complex farming operations, such as corporations or general partnerships with embedded entities, make it difficult for FSA to prevent improper payments to deceased individuals. At present, FSA relies on farming operations to advise the agency of any change in the operation, including the death of a member that would affect payments made to the operation.

FSA Made Millions of Dollars of Farm Program Payments to Deceased Individuals from Fiscal Years 1999 through 2005

From fiscal years 1999 through 2005, FSA paid $1.1 billion in farm program payments to 172,801 deceased individuals—either as individuals or as members of entities, according to our matching of FSA’s payment databases with the Social Security Administration’s Death Master File. Of the $1.1 billion in farm payments, 40 percent went to individuals who had been dead for 3 or more years, and 19 percent went to individuals who had been dead for 7 or more years. Figure 1 shows the number of years in which FSA made farm program payments after an individual had died and the value of those payments. As the figure shows, for example, FSA provided $210 million in farm program payments to deceased individuals 7 or more years after their date of death.

Three cases illustrate how FSA’s lack of management controls can result in improper payments to deceased individuals. In the first case, FSA provided more than $400,000 in farm program payments from 1999 through 2005 to an Illinois farming operation on the basis of the ownership interest of an individual who had died in 1995. According to FSA’s records, the farming operation consisted of about 1,900 cropland acres producing mostly corn and soybeans. It was organized as a corporation with four shareholders, with the deceased individual owning a 40.3-percent interest in the entity. Nonetheless, we found that the deceased individual had resided in Florida. Another member of this farming operation, who resided in Illinois and had signature authority for the operation, updated the operating plan most recently in 2004 but failed to notify FSA of the individual’s death. The farming operation therefore continued to qualify for farm program payments on behalf of the deceased individual. As noted earlier, FSA requires farming operations to certify that they will notify FSA of any change in their operation and to provide true and correct information. According to USDA regulations, failure to do so may result in forfeiture of payments and an assessment of a penalty. FSA recognized this problem in December 2006 when the children of the deceased individual contacted the FSA field office to obtain signature authority for the operation. FSA has begun proceedings to collect the improper payments.

In the second case, FSA provided more than $200,000 in farm program payments from 1999 through 2002 to an Indiana farming operation on the basis of the ownership interest of an individual who had died in 1993. According to FSA’s records, the farming operation was a corporation, and the deceased individual held 100-percent ownership interest in the entity. The corporation operated farms in two counties, but upon the death of the individual, the corporation failed to notify the FSA field office in either county of the death. The corporation therefore continued to receive farm program payments on behalf of the deceased individual until 2002, when it filed a new farm operating plan with FSA that no longer included the deceased individual as a member. When we brought this case to the attention of FSA officials, they were unaware that the individual had died in 1993 and acknowledged that FSA provided improper payments to the farming operation from 1993 through 2002. According to agency officials, they intend to take action against the farming operation to recover the improper payments.

In the third case, FSA provided about $260,000 in farm program payments from 1999 through 2006 to a corporation on the basis of the ownership interest of an individual who had died in 1993. According to FSA records, the farming operation had 14 shareholders, with the deceased individual holding a 14-percent interest. We found that another member of this farming operation, who had signature authority for the operation, updated the farm’s operating plan in 2004 but failed to notify FSA of the death of this member who we found had resided in a metropolitan area several hundred miles from the farm. The farming operation therefore continued to receive farm program payments on behalf of the deceased individual. FSA was unaware that the individual had died in 1993, but said it would investigate and if improper payments were made it would take action against the farming operation to recover the payments.

USDA recognizes that its farm programs have management control weaknesses, making them vulnerable to significant improper payments. In its FY 2006 Performance and Accountability Report to OMB, USDA reported that poor management controls led to improper payments to some farmers, in part because of incorrect or missing paperwork. In addition, as part of its reporting of improper payments information, USDA identified six FSA programs susceptible to significant risk of improper payments with estimated improper payments totaling over $2.8 billion in fiscal year 2006, as shown in table 3.

Complex Farming Operations and a Lack of Management Controls Raise the Potential for Improper Payments to Deceased Individuals

Farm program payments made to deceased individuals indirectly—that is, as members of farming entities—represent a disproportionately high share of post-death payments. Specifically, payments to deceased individuals through entities accounted for $648 million—or 58 percent of the $1.1 billion in payments made to all deceased individuals from 1999 through 2005. However, payments to individuals through entities accounted for $35.6 billion—or 27 percent of the $130 billion in farm program payments FSA provided from 1999 through 2005. Similarly, we identified 39,834 of the 172,801 deceased individuals as receiving farm program payments through entities when we compared FSA’s databases with the Social Security Administration’s Death Master File.

The complex nature of some types of farming entities, in particular, corporations and general partnerships, increases the potential for improper payments. For example, a significant portion of farm program payments went to deceased individuals who were members of corporations and general partnerships. Deceased individuals identified as members of corporations and general partnerships received nearly three- quarters of the $648 million that went to deceased individuals in all entities. The remaining one-quarter of payments went to deceased individuals of other types of entities, including estates, joint ventures, limited partnerships, and trusts. With regard to the number of deceased individuals who received farm program payments through entities, they were most often members of corporations and general partnerships. Specifically, of the 39,834 deceased individuals who received farm program payments through entities, about 57 percent were listed in FSA’s databases as members of corporations or general partnerships. Table 4 shows the number and percent of farm program payments FSA made to deceased individuals through entities from 1999 through 2005.

As we reported in 2004, some farming operations may reorganize to overcome payment limits to maximize their program benefits. Large farming operations are often structured as corporations or general partnerships with other entities embedded within these entities. Deceased individuals are sometimes members of these embedded entities. For example, as shown in table 4, 8,575 deceased individuals received payments through general partnerships from 1999 through 2005. Of these, 687 received farm program payments because they were members of one or more entities that were embedded in the general partnership. Generally, these partnerships are consistent with the 1987 Act, as amended, whereby an individual can qualify for up to three payments by being a member of three entities within one general partnership. Furthermore, of the 172,801 deceased individuals identified as receiving farm program payments, 5,081 received more than one payment because (1) they were a member of more than one entity, or (2) they received payments as an individual and were a member of an entity.

According to FSA field officials, complex farming operations, such as corporations and general partnerships with embedded entities, make it difficult for FSA to prevent making improper payments to deceased individuals. In particular, in many large farming operations, one individual often holds signature authority for the entire farming operation, which may include multiple members or entities. This individual may be the only contact FSA has with the operation; therefore, FSA cannot always know that each member of the operation is represented accurately to FSA by the signing individual for several reasons. First, it relies on the farming operation to self-certify that the information provided is accurate and that the operation will inform FSA of any operating plan changes, which would include the death of an operation’s member. Such notification would provide USDA with current information to determine the eligibility of the entity to receive the payments. Second, FSA has no management controls, such as computer matching of its payment files with the Social Security Administration’s Death Master File, to verify that an ongoing farming operation has failed to report the death of a member.

Conclusions

FSA has a formidable task—ensuring that billions of dollars in program payments are made only to estates and individuals that are eligible to receive them. Our review, however, demonstrates that FSA field offices do not always conduct the necessary annual determinations to ensure that estates are eligible to receive farm program payments. FSA’s performance of these determinations for estates that have been kept open for more than 2 years could serve as an effective deterrent to making improper program payments. However, these determinations can only be a deterrent if they are consistently and thoroughly conducted. As we have found, some FSA field offices have failed to conduct eligibility determinations or have not conducted them consistently and documented the results of their determinations.

FSA has relied on farming operations to report the death of a member whose ownership interest makes the operation eligible for program payments. However, it appears that some individuals who certify program eligibility forms for farming operations are either not taking seriously their obligation to notify FSA of the death of a member of the operation or are deliberately withholding this information to maximize their receipt of farm program payments. Our matching of FSA’s farm payment database with the Social Security Administration’s Death Master File indicates that FSA’s reliance is misplaced, in at least some instances. We previously reported that we found examples of farming operations where recipients may circumvent the payment limits by organizing large farming operations to maximize program payments. The complex nature of these entities—such as entities embedded within other entities—increases the potential that deceased individuals will receive farm program payments because the status of these individuals is not easy for FSA to ascertain. Currently, FSA does not have effective management controls to verify that an individual receiving farm program payments, either directly or indirectly through an entity, is still alive. The lack of these controls increases the risk of improper payments being made over time.

The shortcomings we have identified underscore the need for improved oversight of federal farm programs. Such oversight can help to ensure that program funds are spent as economically, efficiently, and effectively as possible, and that they benefit those engaged in farming as intended.

Recommendations for Executive Action

To provide reasonable assurance that FSA does not make improper payments to estates and deceased individuals, we recommend that the Secretary of Agriculture direct the Administrator of the Farm Service Agency to instruct FSA field offices to conduct all annual estate eligibility determinations as required; implement management controls, such as matching payment files with the Social Security Administration’s Death Master File, to verify that an individual receiving farm program payments has not died; and determine if improper program payments have been made to deceased individuals or to entities that failed to disclose the death of a member, and if so, recover the appropriate amounts.

In addition, we have referred the cases we identify in this report to USDA’s Office of Inspector General for further investigation.

Agency Comments and Our Evaluation

We provided FSA with a draft of this report for review and comment. FSA agreed with our recommendations and already has begun to take action to implement them. For example, FSA has issued a notice (Notice PL-158, May 31, 2007) to its field offices emphasizing the current payment eligibility rules, procedures, and review requirements for payments with respect to deceased individuals and estates. This directive instructs these offices to review the eligibility of all estates that have been open for more than 2 years and requested 2007 farm program benefits. Furthermore, according to FSA, it is currently working with the Social Security Administration to obtain access to the Death Master File of deceased individuals. FSA intends to develop a process for matching its payment data against the Death Master File on at least an annual basis. According to FSA, it will then have a reliable means for identifying deceased individuals who may also be payment recipients. In addition, once implemented, FSA will no longer have to depend on the farming operation to notify the agency of an individual’s death.

Despite its concurrence with our recommendations, FSA did not agree with our use of the term “improper payments” in this report. FSA suggested that we revise the report to refer to the payments as at most “questionable” in view of current eligibility regulations, rather than improper. Specifically, the agency stated that the payments we describe do not meet the definition of improper payments under IPIA. We disagree. We believe three cases we highlight in examples in the report do meet the definition of improper payments under IPIA. IPIA defines improper payments as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. This definition would include any payment made to an ineligible recipient either directly or through an entity. Our examples are consistent with this definition. Furthermore, officials in FSA’s field offices agreed with our findings and told us they intend to recover the payments. For the remaining farm program payments identified in the report, we continue to believe that the potential exists for improper payments because of the lack of FSA management controls and the complexity of some of the farming operations involved. Under current circumstances, FSA cannot be assured that millions of dollars in farm program payments are going to those who met eligibility requirements and thus should have received these payments.

FSA’s written comments are presented in appendix II. FSA also provided us with suggested technical corrections, which we have incorporated into this report, as appropriate.

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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 payment eligibility provisions to identify improper payments to estates and deceased individuals. Specifically, we evaluated the extent to which FSA (1) follows its regulations that are intended to provide reasonable assurance that farm program payments go only to eligible estates and (2) makes improper payments to deceased individuals.

To determine how well FSA field offices carry out rules that prohibit payments to ineligible recipients, we reviewed guidance that FSA field offices use to determine farm program payment eligibility, including relevant statutes and regulations and agency policy, including the FSA Handbook on Payment Limitations, 1-PL (Revision 1). We reviewed relevant studies prepared by the U.S. Department of Agriculture’s (USDA) Office of Inspector General and the Congressional Research Service, as well as our own past reports. We also reviewed USDA’s FY 2006 Performance and Accountability Report to understand its assessment of internal controls for its farm programs. In addition, we spoke with FSA officials in headquarters, state offices, and local field offices who are responsible for ensuring that (1) estates are properly reviewed for eligibility and (2) payments are not made to deceased individuals.

We obtained and analyzed FSA’s computer databases for information on payment recipients from 1999 through 2005. These databases included FSA’s Producer Payment Reporting System, Commodity Certificate file, and Permitted Entity file. The databases contain detailed information on payment recipients: Social Security numbers, payment amounts, the status of recipients as individuals or members of entities, their ownership interest in entities, types of entity, and additional organizational details. The databases also contain information on payments made under USDA’s farm programs, including the Direct and Counter-Cyclical Payments Program, Marketing Assistance Loan Program, Conservation Reserve Program, and Environmental Quality Incentives Program. We also compiled data on farm program benefits provided through cooperative marketing associations. Because our analysis covered the years 1999 through 2005, it also included farm payments from programs authorized before the Farm Security and Rural Investment Act of 2002, such as production flexibility contract payments authorized under the Agriculture Market Transition Act and market loss assistance payments and crop disaster assistance payments authorized under various ad hoc legislation. Appendix III provides a list of USDA farm programs we reviewed.

To evaluate FSA’s application of regulations and guidance to assess the overall effectiveness of its review process for deciding whether estates are eligible to receive farm program payments, we reviewed a nonrandom sample of estate eligibility determinations. To identify estates for our review, we analyzed FSA’s databases. The data showed that 2,841 estates had received payments for more than 2 years between 1999 and 2005, thus requiring FSA to conduct a determination of eligibility. Of these, we examined 181 estates in 26 states and 142 counties. These estates included the 162 (i.e., 162 of 2,841) that received over $100,000 in farm program payments during this period. We also selected the 16 estates (i.e., 16 of 2,841) that (1) had received between $50,000 and $100,000 in farm program payments during this period and (2) had at least one member receiving payments through three other entities, which could indicate circumvention of the three-entity rule. Lastly, we selected the three estates (i.e., 3 of 2,841) that had at least one member receiving payments through seven or more other entities.

For each estate selected, we reviewed case file documents to verify the basis for FSA field offices’ decisions to grant eligibility. Specifically, we obtained and reviewed files from FSA field offices that ideally would have included the following information to facilitate FSA’s determinations: letters testamentary from a probate court, minutes of the FSA county committee meeting that approved eligibility, explanation letters or documentation for the reason the estate remained active beyond 2 years, farm operating plans, and payment history. States and counties vary widely in the amount and type of documentation they require for probated estates. Consequently, we could not easily determine whether improper payments were made to estates. Furthermore, even in cases in which FSA had not done the required annual determinations, or when relevant documentation was missing or incomplete in the estate file, we could not determine whether improper payments were made without examining each case in depth.

To evaluate the extent to which FSA makes improper payments to deceased individuals, we compared recipients of farm program payments in FSA’s computer databases with individuals whose Social Security numbers were listed in the Social Security Administration’s Death Master File, to identify post-death program payments for individuals who were deceased. The Death Master File contains information such as the name and Social Security numbers of deceased individuals in the United States. We assessed the reliability of FSA’s data by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of our review. Although we did not assess the reliability of the Social Security Administration’s Death Master File, it is the most comprehensive list of death information available in the federal government and is generally used by other government agencies and researchers.

Using FSA’s databases, we identified the 2.9 million individuals who received payments, either directly or indirectly through an entity, from 1999 through 2005. Payments were attributed to members of an entity by apportioning the payments according to each member’s percentage share of that entity. Using these Social Security numbers, we then compared these individuals with individuals listed in the Social Security Administration’s Death Master File to determine the extent to which deceased individuals may have received improper payments. The data match showed the number and dollar amount of payments FSA provided to deceased individuals from 1999 through 2005. To gain an understanding of circumstances behind seemingly improper payments, we obtained relevant documents from FSA, including farm operating plans and acreage reports, for selected cases.

We conducted our review between June 2006 and May 2007 in accordance with generally accepted government auditing standards.

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

GAO’s Comments

1. We believe the payments we highlight in three examples in the report meet the definition of improper payments under IPIA. IPIA defines improper payments as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements. This definition would include any payment made to an ineligible recipient either directly or through an entity. Our examples are consistent with this definition. Furthermore, officials in FSA’s field offices agreed with our findings and told us they intend to recover the payments. For the remaining farm program payments identified in the report, we continue to believe that the potential exists for improper payments because of the lack of FSA management controls and the complexity of some of the farming operations involved. Under current circumstances, FSA cannot be assured that millions of dollars in farm program payments are going to those who met eligibility requirements and thus should have received these payments. 2. For each of the three examples discussed in the report, we verified the accuracy of information in FSA’s payment system and discussed the estate with the FSA field office where the estate was located. Because the field offices have this information, we do not understand why FSA does not believe the report provided sufficient information to investigate these cases further. 3. We would expect FSA field offices to have appropriate documents to verify acceptable reasons for keeping the estate open. These files could have included the following information to facilitate FSA’s determinations: letters testamentary from a probate court, minutes of the FSA county committee meeting that approved eligibility, explanation letters or documentation for the reason the estate remained active beyond 2 years, and farm operating plans. However, when annual determinations were not done or relevant documentation was missing or incomplete in the files, we could not determine with certainty whether improper payments were made to estates. As we discuss on page 4 of this report, the wide variation in state and county documentation required for probated estates made it difficult for us to make eligibility determinations. We continue to believe that the failure of FSA’s field offices to conduct annual determinations of eligibility increases the risk of improper payments being made over time. 4. FSA implies that because the $1.1 billion in farm program payments paid to deceased individuals during 1999 through 2005 amounts to only 8/10 of 1 percent of the total payments made during this period, the amount is negligible. We disagree—a billion dollars is not a negligible sum. In addition, this amount represents only payments made to deceased individuals during this specific period; it does not capture payments made to deceased individuals before and after this period. FSA is obligated to ensure that program funds are spent as economically, efficiently, and effectively as possible. The nation’s current deficit and growing long-term fiscal challenges reinforce the importance of this obligation. Implementing management controls, such as matching payment files with the Social Security Administration’s Death Master File, to verify that an individual receiving farm program payments has not died is a simple, cost- effective means to achieve this end. 5. FSA is correct that counter-cyclical payments may be made for up to 3 years after an individual has died. However, according to our analysis, only $46.5 million (4.2 percent) of the $1.1 billion in payments made to deceased individuals from 1999 through 2005 were counter-cyclical payments made for the same program year as the year in which the individual died. Furthermore, a farming operation is subject to forfeiture of payments, including counter-cyclical payments, if it has not notified FSA of a change in the farming operation, such as the death of an individual who receives payments as a member of that operation. Many deceased individuals who received counter-cyclical payments during this period also received payments under other programs for which FSA should have been notified of the change in the farming operation. However, the fact that an individual was identified as deceased in our computer matching indicates FSA was not informed that a change in the farm operation had occurred, suggesting that the farming operation was not eligible to receive any of the payments, including the counter-cyclical payments. 6. As noted in the report, the source for information in table 3 (p. 17) is USDA’s FY 2006 Performance and Accountability Report. The improper payments and the percent error rate for each program in table 3 are USDA’s estimates. We acknowledge that improper payments made under the Noninsured Assistance Program are not exclusively the result of payments made to deceased individuals.

Appendix III: U.S. Department of Agriculture Farm Program Payments, Fiscal Years 1999 through 2005

Karnal bunt fungus compensation payments

Lamb Meat Adjustment Assistance Program $(20,257) $(22,175) $(777) (33,187) (467,556) (108,096) (470,359) (779,398) (755,675) (20,557) (2,905)

Soil and Water Agricultural Assistance Program Trade Adjustment Assistance for Farmers Wool & Mohair Market Loss Assistance Program (4,975) (300) $23,807,786,218 (292,942,256) (8,252,201) (2,005,089) (1,569) (1,668) (532) (261) (80) (524) (76,838) (8,136) (1,153)

Includes cotton user marketing certificate gains.

Includes the Apple & Potato Quality Loss Program, Sugar Beet Disaster Program, Quality Loss Program, Crop Loss Disaster Assistance Program, Florida Nursery Losses Program, Florida Hurricane Charley Disaster Program, Disaster Reserve Flood Compensation Program, Florida Hurricane Nursery Disaster Program, Florida Hurricane Vegetable Disaster Program, Multi-Year Crop Loss Disaster Assistance Program, North Carolina Crop Hurricane Damage Program, Nursery Losses In Florida Program, and Single Year Crop Loss Disaster Assistance Program, as well as Disaster Supplemental Appropriation payments, Crop Disaster North Carolina payments, Crop Disaster Virginia payments, and 1999 Citrus Losses In California.

Includes the Dairy Indemnity Program, Dairy Options Pilot Program, and Dairy Production Disaster Assistance Program.

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

Includes “loan deficiency payment-like” grazing payments for wheat, barley, oats, and triticale.

Includes supplemental appropriations for the Noninsured Assistance Program.

Includes supplemental appropriations for the Oilseed Payment Program.

Includes the Sugar Payment-In-Kind Diversion Program.

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

Includes the Yakima Basin Water Program, Flood Compensation Program for Harney County Oregon, Fresh Market Peaches Program, Idaho Oust Program, Livestock Compensation Program- Grants For Catfish Producers, Limited California Cooperative Insolvency Program, New Mexico Tebuthiuron Application Losses Program, New York Onion Producers Program, Potato Diversion Program, Poultry Enteritis Mortality Syndrome Program, Seed Corn Purchase Containing CRY9C Protein Program, Specialty Crops-Base State Grants Program, Specialty Crops-Value Of Production Program, and State Commodity Assistance Program, as well as Consent Decree payments and Interest Penalty payments.

Appendix IV: U.S. Department of Agriculture Estate Eligibility Reviews, by State, Program Years 1999 through 2005

Table 5 shows the variation by state in FSA’s conduct of eligibility determinations from 1999 through 2005 for the 181 estates in our sample. Not all states are represented because we chose estates based on criteria other than location. Our sample of 181 estates included the 162 that received over $100,000 in farm program payments during this period. We also selected the 16 estates that (1) received between $50,000 and $100,000 in farm program payments during this period and (2) had at least one member receiving payments through three other entities, which could indicate circumvention of the three-entity rule. In addition, we selected the three estates that had at least one member receiving payments through seven or more other entities.

Appendix V: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

In addition to the individual named above, James R. Jones, Jr., Assistant Director; Hamid E. Ali; Kevin S. Bray; Thomas M. Cook; Stephanie K. Fain; Ronald E. Maxon, Jr.; Jennifer R. Popovic; and Carol Herrnstadt Shulman made key contributions to this report.

Related GAO Products

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

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

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

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

Financial Management: Challenges Remain in Meeting Requirements of the Improper Payments Information Act. GAO-06-482T. Washington, D.C.: March 9, 2006.

Financial Management: Challenges in Meeting Governmentwide Improper Payment Requirements. GAO-05-907T. Washington, D.C.: July 20, 2005.

Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act. GAO-05-605T. Washington, D.C.: July 12, 2005.

Financial Management: Challenges in Meeting Requirements of the Improper Payments Information Act. GAO-05-417. Washington, D.C.: March 31, 2005.

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

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

Strategies to Manage Improper Payments: Learning From Public and Private Sector Organizations. GAO-02-69G. Washington, D.C.: October 1, 2001.

Farm Programs: Changes to the Marketing Assistance Loan Program Have Had Little Impact on Payments. GAO-01-964. Washington, D.C.: September 28, 2001.

Farm Programs: Information on Recipients of Federal Payments. GAO-01-606. Washington, D.C.: June 15, 2001.

Financial Management: Billions in Improper Payments Continue to Require Attention. GAO-01-44. Washington, D.C.: October 27, 2000.