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. 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.