Federal Farm Programs
USDA Needs to Strengthen Controls to Prevent Payments to Individuals Who Exceed Income Eligibility Limits Gao ID: GAO-09-67 October 24, 2008Farmers receive about $16 billion annually in federal farm program payments. These payments go to about 2 million recipients, both individuals and entities. GAO previously has reported that the U.S. Department of Agriculture (USDA) did not consistently ensure that these payments went only to those who meet eligibility requirements. GAO was asked to evaluate (1) how effectively USDA implemented 2002 Farm Bill provisions prohibiting payments to individuals or entities whose income exceeded $2.5 million and who derived less than 75 percent of that income from farming, ranching, or forestry operations, (2) the potential impact of the 2008 Farm Bill's income eligibility provisions on individuals who receive farm payments, and (3) the distribution of income of these individuals compared with all 2006 tax filers. GAO compared USDA data on individuals receiving payments with the latest available Internal Revenue Service (IRS) data on these individuals.
USDA does not have management controls, such as reviewing an appropriate sample of recipients' tax returns, to verify that payments are made only to individuals who do not exceed income eligibility caps and therefore cannot be assured that millions of dollars in farm program payments it made are proper. GAO found that of the 1.8 million individuals receiving farm payments from 2003 through 2006, 2,702 had an average adjusted gross income (AGI) that exceeded $2.5 million and derived less than 75 percent of their income from farming, ranching, or forestry operations, thereby making them potentially ineligible for farm payments. Nevertheless, USDA paid over $49 million to these individuals. According to USDA officials, a number of factors--such as resource constraints that hamper its ability to examine complex tax and financial information as well as a lack of authority to obtain and use IRS tax filer data for such purposes--contribute to the department's inability to verify that each individual who receives farm program payments complies with income eligibility provisions. However, USDA does not routinely sample individuals receiving farm payments to test for income eligibility; instead, its annual sample selected for review is based primarily on compliance with eligibility requirements other than income. The 2008 Farm Bill directs USDA to use statistical methods to target those individuals most likely to exceed income eligibility caps. The 2008 Farm Bill will increase the number of individuals likely to exceed the income eligibility caps. That is, with lower income eligibility caps under the 2008 Farm Bill, the number of individuals whose AGI exceeds the caps will rise, increasing the risk that USDA will make improper payments to more individuals. For example, had the new Farm Bill been in effect in 2006, as many as 23,506 individuals who received farm program payments would likely have been ineligible for crop subsidy and disaster assistance payments totaling as much as $90 million. Compared with all tax filers, individuals who participated in farm programs in 2006 are more likely to have higher incomes. For example, 12 of every 1,000 individuals receiving farm program payments reported AGI between $500,000 and $1 million compared with about 4 of all tax filers who reported income at this level.
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Director: Team: Phone:GAO-09-67, Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent Payments to Individuals Who Exceed Income Eligibility Limits
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Report to the Ranking Member, Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
October 2008:
Federal Farm Programs:
USDA Needs to Strengthen Controls to Prevent Payments to Individuals
Who Exceed Income Eligibility Limits:
Federal Farm Programs:
GAO-09-67:
GAO Highlights:
Highlights of GAO-09-67, a report to the Ranking Member, Committee on
Finance, U.S. Senate.
Why GAO Did This Study:
Farmers receive about $16 billion annually in federal farm program
payments. These payments go to about 2 million recipients, both
individuals and entities. GAO previously has reported that the U.S.
Department of Agriculture (USDA) did not consistently ensure that these
payments went only to those who meet eligibility requirements.
GAO was asked to evaluate (1) how effectively USDA implemented 2002
Farm Bill provisions prohibiting payments to individuals or entities
whose income exceeded $2.5 million and who derived less than 75 percent
of that income from farming, ranching, or forestry operations, (2) the
potential impact of the 2008 Farm Bill‘s income eligibility provisions
on individuals who receive farm payments, and (3) the distribution of
income of these individuals compared with all 2006 tax filers. GAO
compared USDA data on individuals receiving payments with the latest
available Internal Revenue Service (IRS) data on these individuals.
What GAO Found:
USDA does not have management controls, such as reviewing an
appropriate sample of recipients‘ tax returns, to verify that payments
are made only to individuals who do not exceed income eligibility caps
and therefore cannot be assured that millions of dollars in farm
program payments it made are proper. GAO found that of the 1.8 million
individuals receiving farm payments from 2003 through 2006, 2,702 had
an average adjusted gross income (AGI) that exceeded $2.5 million and
derived less than 75 percent of their income from farming, ranching, or
forestry operations, thereby making them potentially ineligible for
farm payments. Nevertheless, USDA paid over $49 million to these
individuals. According to USDA officials, a number of factors”such as
resource constraints that hamper its ability to examine complex tax and
financial information as well as a lack of authority to obtain and use
IRS tax filer data for such purposes”contribute to the department‘s
inability to verify that each individual who receives farm program
payments complies with income eligibility provisions. However, USDA
does not routinely sample individuals receiving farm payments to test
for income eligibility; instead, its annual sample selected for review
is based primarily on compliance with eligibility requirements other
than income. The 2008 Farm Bill directs USDA to use statistical methods
to target those individuals most likely to exceed income eligibility
caps.
The 2008 Farm Bill will increase the number of individuals likely to
exceed the income eligibility caps. That is, with lower income
eligibility caps under the 2008 Farm Bill, the number of individuals
whose AGI exceeds the caps will rise, increasing the risk that USDA
will make improper payments to more individuals. For example, had the
new Farm Bill been in effect in 2006, as many as 23,506 individuals who
received farm program payments would likely have been ineligible for
crop subsidy and disaster assistance payments totaling as much as $90
million.
Compared with all tax filers, individuals who participated in farm
programs in 2006 are more likely to have higher incomes. For example,
as shown in the figure below, 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.
What GAO Recommends:
GAO recommends that USDA work with IRS to develop a system for
verifying the income eligibility for all recipients of farm program
payments. If USDA determines that it needs authority to work with IRS,
it should seek this authority from Congress, as appropriate. In
commenting on a draft of this report, USDA agreed with these
recommendations but disputed some of the findings. GAO believes that
the report is fair and accurate.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/products/GAO-09-67]. For more
information, contact Lisa Shames at (202) 512-3841 or shamesl@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Millions of Dollars in Farm Program Payments Went to Potentially
Ineligible Individuals Because USDA Does Not Have Adequate Management
Controls:
2008 Farm Bill Increases the Number of Individuals Likely Affected by
the AGI Cap:
Individuals Who Receive Farm Program Payments Generally Report Higher
Incomes Than All Tax Filers:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the U.S. Department of Agriculture:
GAO's Comments:
Appendix III: U.S. Department of Agriculture Farm Program Payments by
Program or Payment Type, Fiscal Years 2003-2006:
Appendix IV: Distribution of Income for Individuals Receiving Farm
Program Payments Compared with All Tax Filers, 2006:
Appendix V: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Number of Individuals Potentially Ineligible for Farm Payments
under the 2002 Farm Bill's AGI Provisions and Amount of Farm Program
Payments They Received, Fiscal Years 2003 through 2006:
Table 2: Farm Program Payments Made to Potentially Ineligible
Individuals through Entities, Fiscal Years 2003 through 2006:
Table 3: Estimated Effect of 2008 Farm Bill's Income Eligibility Caps
on Individuals Who Received Farm Program Payments in 2006:
Table 4: Estimated Effect of 2008 Farm Bill's Income Eligibility Caps
on Individuals Who Received Farm Program Payments in 2006:
Figures:
Figure 1: Percentage of $49.4 Million Paid to Potentially Ineligible
Individuals, by Program, Fiscal Years 2003 through 2006:
Figure 2: Distribution of Income of Individuals Receiving Farm Program
Payments and All Tax Filers, 2006:
Abbreviations:
2008 Farm Bill: Food, Conservation, and Energy Act of 2008:
2002 Farm Bill: Farm Security and Rural Investment Act of 2002:
AGI: adjusted gross income:
FSA: Farm Service Agency:
IPIA: Improper Payments Information Act of 2002:
IRS: Internal Revenue Service:
USDA: U.S. Department of Agriculture:
United States Government Accountability Office:
Washington, DC 20548:
October 24, 2008:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
Dear Senator Grassley:
Farmers receive about $16 billion annually in federal farm program
payments for crop subsidies, conservation practices, and disasters.
These payments go to about 2 million recipients, both individuals and
entities, including corporations, partnerships, and trusts. As we
reported in November 2006, the U.S. Department of Agriculture (USDA)
needed to better oversee farm program payments.[Footnote 1] Without
better oversight to ensure that farm program funds are spent as
economically, efficiently, and effectively as possible, we noted, USDA
had little assurance that these funds benefit the agricultural sector
as intended. We also previously reported that because of weak
management controls at USDA, some payments, potentially totaling
millions of dollars, have gone to deceased individuals or farming
entities organized to receive payments that exceed legislatively
established limits.[Footnote 2] For example, in July 2007 we reported
that USDA paid $1.1 billion in farm payments from 1999 to 2005 in the
names of over 170,000 deceased individuals. We recommended that USDA
strengthen its controls to prevent improper payments to deceased
individuals. In 2004, we recommended that because USDA did not have a
measurable standard for ensuring that farm program payments are going
to individuals who are actively engaged in farming--as required by
statute and USDA's regulations--it allowed individuals with limited
involvement to receive these payments. USDA agreed that it would be
beneficial to have a measurable standard. However, to date, USDA has
not taken any action on our recommendation, stating that its
regulations are sufficient for determining active engagement in
farming.
Under the Farm Security and Rural Investment Act of 2002 (2002 Farm
Bill), an individual or entity with an average adjusted gross income
(AGI) of over $2.5 million, over the previous 3 tax years immediately
preceding the applicable crop year,[Footnote 3] was ineligible for farm
program payments unless at least 75 percent or more of the average AGI
was farm income, defined as income from farming, ranching, or forestry
operations. The AGI provision of the 2002 Farm Bill covered crop years
2003 through 2008 and applied to most farm program payments, including
those for crop subsidy payments (e.g., fixed payments based on
historical production, known as direct payments, and price support
payments), conservation practices, and disasters.[Footnote 4] USDA's
Farm Service Agency is responsible for ensuring that only eligible
individuals receive farm program payments, either directly or as a
member of an entity, and do not receive payments that exceed the
established limits. USDA has relied principally on individuals' one-
time self-certifications that they do not exceed income eligibility
caps, and their commitment that they will notify USDA of any changes
that cause them to exceed these caps. To verify the certification, USDA
field offices have been able to request these individuals to submit
their tax returns for review. Individuals failing to provide accurate
information to verify compliance may not be eligible to receive farm
program payments for the year or years of the request.[Footnote 5]
Nevertheless, concerns remained about whether it was appropriate for
wealthy individuals to participate in taxpayer-funded farm programs.
The Food, Conservation, and Energy Act of 2008 (2008 Farm Bill),
enacted on June 18, 2008, revised the income eligibility caps for farm
program payments. In general, the 2008 Farm Bill provides that for crop
years 2009 through 2012, a person or entity is ineligible for:
* direct payments if the individual's or entity's 3-year average farm
income exceeds $750,000;
* all crop subsidy and disaster payments if the individual's or
entity's 3-year average non-farm income exceeds $500,000; or:
* all conservation program payments if an individual's or entity's 3-
year average non-farm income exceeds $1 million, unless at least 66.66
percent of the individual's or entity's 3-year average AGI is
attributable to activities related to farming, ranching, or
forestry.[Footnote 6]
In this context, we were asked to evaluate (1) how effectively USDA
implemented provisions under the 2002 Farm Bill that prohibited
payments to individuals or entities whose income exceeded $2.5 million
and who derived less than 75 percent of that income from farming,
ranching, or forestry operations; (2) the potential impact of the 2008
Farm Bill's AGI provisions on individuals who receive farm program
payments; and (3) the distribution of income for individuals receiving
farm program payments compared with all tax filers in 2006.
To address these issues, we reviewed USDA's regulations, guidelines,
and other internal controls for implementing the provisions of the 2002
Farm Bill, and we examined the AGI provisions of the 2008 Farm Bill. We
also spoke to USDA officials in headquarters, and the state office and
one local field office in Louisiana and Mississippi who were
responsible for ensuring that individuals applying for farm payments
under the 2002 Farm Bill complied with the AGI provision. We selected
these offices to provide an example of how USDA implements the AGI
provisions and the information we obtained cannot be generalized to all
field offices. In addition, to evaluate how effectively USDA
implemented the 2002 Farm Bill provisions that prohibited payments to
individuals or entities with incomes from sources other than farming,
ranching, or forestry operations that exceeded the specific limits, we
matched USDA data on the 1.8 million individuals who received farm
program payments with Internal Revenue Service (IRS) tax filer data for
2000 through 2006.[Footnote 7] We limited our review to individuals who
report their taxes as primary filers--the person who is listed first on
an IRS tax form, such as the Form 1040 (U.S. Individual Income Tax
Return). Although we did not analyze tax filer data reported by
entities, such as corporations, partnerships, or trusts, we did include
tax filer data for the individuals who make up the entity. For
individuals with a 3-year average AGI above $2.5 million, we determined
whether at least 75 percent of the income was derived from farming,
ranching, or forestry operations. We obtained farm income data for
these individuals from IRS Form 1040, IRS Schedule F (Profit or Loss
From Farming), and IRS Form 4835 (Farm Rental Income and Expenses).
Schedule F and Form 4835 capture farm income for individuals who report
income from agricultural activities. For all individuals with a 3-year
average AGI above $2.5 million and with less than 75 percent of their
AGI derived from farming, ranching, or forestry operations, we
identified the amount of farm program payments subject to the income
eligibility provision.[Footnote 8] We also identified the amount of
certain program payments not subject to the income provision for these
individuals.[Footnote 9] To determine the potential impact of the 2008
Farm Bill's AGI provisions on individuals receiving farm program
payments in 2006, we categorized these individuals by their AGI
amounts. We identified average farm program payments for each of these
categories and calculated the farm payment income as a percentage of
AGI. To determine the distribution of income for individuals receiving
farm program payments compared with all tax filers, we compared the
income distribution for payment recipients with the income distribution
for all U.S. tax filers in 2006, the latest year for which tax data
were available.
We conducted this performance audit from August 2007 through September
2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. Appendix I
contains more detailed information on our scope and methodology.
Results in Brief:
USDA cannot be assured that millions of dollars in farm program
payments it made are proper because it does not have management
controls, such as reviewing an appropriate sample of recipients' tax
returns, to verify that payments were made only to individuals who did
not exceed the income eligibility caps. Of the 1.8 million individuals
receiving farm payments from 2003 through 2006, 2,702 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, thereby
making them potentially ineligible for farm payments. Nevertheless,
USDA paid over $49 million to these 2,702 individuals. Most notably, of
the 2,702 individuals, 427 received potentially improper payments in
every year we reviewed, and 1,346 received potentially improper
payments through a farming operation consisting of one or more
entities, which can increase the risk of improper payments to
individuals with high incomes because the local USDA field office may
not know all the individuals who are members of the entity.
Furthermore, according to addresses on tax returns for the 2,702
individuals, 78 percent resided in or near a metropolitan area, while
the remaining 22 percent resided in large towns, small towns, and rural
areas. According to USDA officials, a number of factors--such as
resource constraints that hamper its ability to examine complex tax and
financial information and lack of authority to access and use IRS tax
filer data for such purposes--contribute to USDA's inability to verify
that each individual who received farm program payments was eligible
under the AGI provision. We also found, however, that the sample that
USDA draws does not test for income eligibility; instead, USDA reviews
compliance with eligibility requirements other than income, such as the
amount of farm program payments a farming operation received in the
previous year and whether it experienced a change in ownership. USDA
therefore cannot ensure that only individuals who meet the income
eligibility caps are receiving farm payments. The 2008 Farm Bill
directs the Secretary of Agriculture to establish statistically valid
procedures to conduct targeted audits of persons or legal entities most
likely to exceed income eligibility caps.
The 2008 Farm Bill will likely increase the number of individuals who
are likely to exceed the income eligibility caps. Specifically, with
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 even more individuals.
For example, had the new Farm Bill been in effect in 2006, as many as
23,506 individuals who received farm program payments would likely have
been ineligible for crop subsidy and disaster assistance payments
totaling as much as $90 million. Forecasts for high crop prices through
2012 might increase individuals' incomes and, thus, potentially the
number of individuals affected by the caps.
Compared with all tax filers, individuals who participated in farm
programs in 2006 were three times as likely to have AGI exceeding
$500,000 as individuals who did not participate in farm programs. That
is, in 2006, 21 of every 1,000 farm program participants reported an
AGI exceeding $500,000 compared with 7 of every 1,000 of all tax
filers. For the 1.1 million 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.
To ensure greater program integrity, we are recommending that USDA work
with the Internal Revenue Service to develop a method for determining
whether all recipients of farm program payments meet income eligibility
requirements. If USDA finds that it does not have the authority to
obtain information from the Internal Revenue Service, it should
identify and request the authority it would need from Congress, as
appropriate.
We provided USDA with a draft of this report for review and comment.
USDA agreed with our recommendations but disputed some of our findings.
Specifically, 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. While only a small percentage
exceeded the cap under the 2002 Farm Bill, the percentage of
individuals exceeding the 2008 Farm Bill's lower income eligibility cap
is likely to increase. Therefore, USDA will be at greater risk of
making improper payments unless it has better management controls in
place.
USDA also noted that we should not have discussed the "actively engaged
in farming" requirement in this report. We recognize that meeting the
actively engaged in farming requirement is separate and distinct from
the AGI requirement. However, we believe that awareness of this
requirement places the discussion of income eligibility requirements in
the context of other key eligibility requirements and provides a more
comprehensive understanding.
Finally, USDA sought more information about the individual cases we
cite where the AGI apparently exceeded the eligibility requirements.
However, Internal Revenue Code Section 6103 prohibits us from
disclosing any additional information.
Our detailed responses to USDA's comments appear at the end of this
letter and following USDA's written comments in appendix II.
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.[Footnote 10] 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.
Table 1: Number of Individuals Potentially Ineligible for Farm Payments
under the 2002 Farm Bill's AGI Provisions and Amount of Farm Program
Payments They Received, Fiscal Years 2003 through 2006:
Dollars in millions.
Fiscal Year: 2003;
Number of individuals who received payments: 1,379;
Amount of farm program payments: $10.9.
Fiscal Year: 2004;
Number of individuals who received payments: 1,154;
Amount of farm program payments: 8.2.
Fiscal Year: 2005;
Number of individuals who received payments: 1,328;
Amount of farm program payments: 13.3.
Fiscal Year: 2006;
Number of individuals who received payments: 1,617;
Amount of farm program payments: 16.9.
Total;
Number of individuals who received payments: 2,702[A];
Amount of farm program payments: $49.4[B].
Source: GAO analysis of USDA data.
[A] Some individuals received farm program payments in more than one
year. The total represents the number of unique individuals who
received payments rather than the aggregate of all 4 years.
[B] Total does not add due to rounding.
[End of table]
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.[Footnote 11] 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.
Table 2: Farm Program Payments Made to Potentially Ineligible
Individuals through Entities, Fiscal Years 2003 through 2006:
Dollars in millions.
Entity type: Corporations[A];
Number of potentially ineligible individuals who received payments:
800;
Farm program payments: $7.5.
Entity type: General partnerships;
Number of potentially ineligible individuals who received payments:
278;
Farm program payments: 8.3.
Entity type: Limited partnerships;
Number of potentially ineligible individuals who received payments:
255;
Farm program payments: 2.2.
Entity type: Joint ventures;
Number of potentially ineligible individuals who received payments: 53;
Farm program payments: 2.1.
Entity type: Irrevocable trusts;
Number of potentially ineligible individuals who received payments: 55;
Farm program payments: 0.6.
Entity type: Revocable trusts;
Number of potentially ineligible individuals who received payments: 27;
Farm program payments: 0.3.
Entity type: Other[B];
Number of potentially ineligible individuals who received payments: 22;
Farm program payments: 0.1.
Total;
Number of potentially ineligible individuals who received payments:
1,346[C];
Farm program payments: $21.1.
Source: GAO analysis of USDA and IRS data.
[A] Includes limited liability companies and S corporations. An S
corporation is a corporation that is generally not subject to federal
income taxes under the Internal Revenue Code. Instead, shareholders in
S corporations generally include their share of the corporation's
income or losses on their individual returns.
[B] Includes estates and individuals operating as a small business.
[C] Some individuals received farm program payments through one or more
entities. The total represents the number of unique individuals who
received payments.
[End of table]
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.[Footnote 12] 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.[Footnote 13] 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.[Footnote 14] 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.
Figure 1: Percentage of $49.4 Million Paid to Potentially Ineligible
Individuals, by Program, Fiscal Years 2003 through 2006:
This figure is a pie graph showing percentage of $49.4 million paid to
potentially ineligible individuals, by program, fiscal years 2003
through 2006.
Direct and Counter-Cyclical Payments Program: 50%;
Conservation Reserve Program: 29%;
Marketing Assistance Loan Program: 11%;
Environmental Quality Incentives Program: 6%;
Other programs: 4%.
[See PDF for image]
Note: Other programs include the Conservation Security Program,
Grassland Reserve Program, Wetlands Reserve Program, and Wildlife
Habitat Incentives Program.
[End of figure]
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.[Footnote 15] 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.
Table 3: Estimated Effect of 2008 Farm Bill's Income Eligibility Caps
on Individuals Who Received Farm Program Payments in 2006:
Income eligibility cap: Average farm income exceeding $750,000;
Range of potentially ineligible individuals: 41-4,688;
Range of potentially ineligible payments (Dollars in millions):
Direct[A]: $0.7- $23.0;
Range of potentially ineligible payments (Dollars in millions): Crop
subsidy and disaster assistance[B]: d;
Range of potentially ineligible payments (Dollars in millions):
Conservation[C]: e.
Income eligibility cap: Average non-farm income exceeding $500,000;
Range of potentially ineligible individuals: 3,594-23,506;
Range of potentially ineligible payments (Dollars in millions):
Direct[A]: $12.9-$81.6;
Range of potentially ineligible payments (Dollars in millions): Crop
subsidy and disaster assistance[B]: $14.0- $90.4;
Range of potentially ineligible payments (Dollars in millions):
Conservation[C]: e.
Income eligibility cap: Average non-farm income exceeding $1 million
and less than 66.66 percent of AGI is derived from farm income;
Range of potentially ineligible individuals: 1,552-9,814;
Range of potentially ineligible payments (Dollars in millions):
Direct[A]: f;
Range of potentially ineligible payments (Dollars in millions): Crop
subsidy and disaster assistance[B]: f;
Range of potentially ineligible payments (Dollars in millions):
Conservation[C]: $3.3- $19.1.
Source: GAO analysis of USDA and IRS data.
Note: Analysis is based on the 1.1 million individuals who received
farm program payments and filed single or joint tax returns as the
primary filer in 2006.
[A] Direct payments under the Direct and Counter-Cyclical Payments
Program.
[B] Includes counter-cyclical payments under the Direct and Counter-
Cyclical Payments Program as well as payments under the Marketing
Assistance Loan Program and crop disaster programs. Excludes direct
payments.
[C] Includes payments under the Conservation Reserve Program,
Environmental Quality Incentives Program, and Conservation Security
Program.
[D] Individuals are eligible for these payments unless their non-farm
income exceeds $500,000.
[E] Individuals are eligible for these payments unless their non-farm
income exceeds $1 million and less than 66.66 percent of their AGI is
derived from farm income.
[F] Some individuals in this income category would have already
exceeded the income eligibility caps for both farm and non-farm income.
[End of table]
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.[Footnote 16] 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.[Footnote 17]
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.
Figure 2: Distribution of Income of Individuals Receiving Farm Program
Payments and All Tax Filers, 2006:
This figure is a combination of bar graph showing distribution of
income of individuals receiving farm program payments and all tax
filers, 2006. The X axis represents the adjusted gross income, and the
Y axis represents the individuals per 1,000 tax returns. The bars
represent individuals receiving farm program payments, and the other
represents all tax filers
Adjusted gross income: $500,000 to under $1,000,000;
Individuals receiving farm program: 12;
All tax filers: 4.
Adjusted gross income: $1,000,000 to under $1,500,000;
Individuals receiving farm program: 4;
All tax filers: 1.
Adjusted gross income: $1,500,000 to under $2,000,000;
Individuals receiving farm program: 2;
All tax filers: 0.
Adjusted gross income: $2,000,000 to under $5,000,000;
Individuals receiving farm program: 3;
All tax filers: 1.
Adjusted gross income: $5,000,000 to under $10,000,000;
Individuals receiving farm program: 1;
All tax filers: 0.
Adjusted gross income: $10,000 or more;
Individuals receiving farm program: 0;
All tax filers: 0.
[See PDF for image]
Source: GAO analysis of USDA and IRS data.
[End of figure]
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.
As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its issue date. At that time we will send copies of this report to
appropriate congressional committees, the Secretary of Agriculture; the
Director, Office of Management and Budget; and other interested
parties. In addition, this report will be available at no charge on
GAO's Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-3841 or shamesl@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in appendix V.
Sincerely yours,
Signed by:
Lisa Shames:
Director, Natural Resources and Environment:
[End of section]
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.[Footnote 18] 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.
Table 4: Estimated Effect of 2008 Farm Bill's Income Eligibility Caps
on Individuals Who Received Farm Program Payments in 2006:
Dollars in millions.
Percent of income: Non-farm: Joint tax returns: 0;
Percent of income: Joint tax returns: 100;
Direct[A] (Non-Farm income): Ineligible individuals: 0;
Direct[A] (Non-Farm income): Ineligible payments: 0.0;
Direct[B] (farm income): Ineligible individuals: 4,680;
Direct[B] (farm income): Ineligible payments: 22.9;
Crop subsidy and disaster assistance[C]: Ineligible individuals: 0;
Crop subsidy and disaster assistance[C]: Ineligible payments: 0.0;
Conservation[D]: Ineligible individuals: 0;
Conservation[D]: Ineligible payments: 0.0.
Percent of income: Non-farm: Joint tax returns: 10;
Percent of income: Farm: Joint tax returns: 90;
Direct[A] (Non-Farm income): Ineligible individuals: 1,011;
Direct[A] (Non-Farm income): Ineligible payments: 2.9;
Direct[B] (farm income): Ineligible individuals: 3,722;
Direct[B] (farm income): Ineligible payments: 18.4;
Crop subsidy and disaster assistance[C]: Ineligible individuals: 1,011;
Crop subsidy and disaster assistance[C]: Ineligible payments: 3.8;
Conservation[D]: Ineligible individuals: 244;
Conservation[D]: Ineligible payments: 0.5.
Percent of income: Non-Farm: Joint tax returns: 20;
Percent of income: Farm: Joint tax returns: 80;
Direct[A] (Non-Farm income): Ineligible individuals: 2,573;
Direct[A] (Non-Farm income): Ineligible payments: 8.0;
Direct[B] (farm income): Ineligible individuals: 2,639;
Direct[B] (farm income): Ineligible payments: 13.2;
Crop subsidy and disaster assistance[C]: Ineligible individuals: 2,573;
Crop subsidy and disaster assistance[C]: Ineligible payments: 9.8;
Conservation[D]: Ineligible individuals: 633;
Conservation[D]: Ineligible payments: 1.1.
Percent of income: Non-Farm: Joint tax returns: 30;
Percent of income: Farm: Joint tax returns: 70;
Direct[A] (Non-Farm income): Ineligible individuals: 4,356;
Direct[A] (Non-Farm income): Ineligible payments: 14.7;
Direct[B] (farm income): Ineligible individuals: 1,273;
Direct[B] (farm income): Ineligible payments: 6.7;
Crop subsidy and disaster assistance[C]: Ineligible individuals: 4,356;
Crop subsidy and disaster assistance[C]: Ineligible payments: 17.3;
Conservation[D]: Ineligible individuals: 1,134;
Conservation[D]: Ineligible payments: 1.8.
Percent of income: Non-Farm: Joint tax returns: 40;
Percent of income: Farm: Joint tax returns: 60;
Direct[A] (Non-Farm income): Ineligible individuals: 6,327;
Direct[A] (Non-Farm income): Ineligible payments: 21.4;
Direct[B] (farm income): Ineligible individuals: 130;
Direct[B] (farm income): Ineligible payments: 1.8;
Crop subsidy and disaster assistance[C]: Ineligible individuals: 6,327;
Crop subsidy and disaster assistance[C]: Ineligible payments: 24.6;
Conservation[D]: Ineligible individuals: 2,566;
Conservation[D]: Ineligible payments: 5.2.
Percent of income: Non-Farm: Joint tax returns: 50;
Percent of income: Farm: Joint tax returns: 50;
Direct[A] (Non-Farm income): Ineligible individuals: 8,279;
Direct[A] (Non-Farm income): Ineligible payments: 28.7;
Direct[B] (farm income): Ineligible individuals: 68;
Direct[B] (farm income): Ineligible payments: 1.1;
Crop subsidy and disaster assistance[C]: Ineligible individuals: 8.279;
Crop subsidy and disaster assistance[C]: Ineligible payments: 32.7;
Conservation[D]: Ineligible individuals: 3,428;
Conservation[D]: Ineligible payments: 6.6.
Percent of income: Non-Farm: Joint tax returns: 60;
Percent of income: Farm: Joint tax returns: 40;
Direct[A] (Non-Farm income): Ineligible individuals: 10,419;
Direct[A] (Non-Farm income): Ineligible payments: 36.3;
Direct[B] (farm income): Ineligible individuals: 46;
Direct[B] (farm income): Ineligible payments: 0.8;
Crop subsidy and disaster assistance[C]: Ineligible individuals:
10,419;
Crop subsidy and disaster assistance[C]: Ineligible payments: 41.6;
Conservation[D]: Ineligible individuals: 4,346;
Conservation[D]: Ineligible payments: 8.4.
Percent of income: Non-Farm: Joint tax returns: 70;
Percent of income: Farm: Joint tax returns: 30;
Direct[A] (Non-Farm income): Ineligible individuals: 12,694;
Direct[A] (Non-Farm income): Ineligible payments: 43.8;
Direct[B] (farm income): Ineligible individuals: 38;
Direct[B] (farm income): Ineligible payments: 0.6;
Crop subsidy and disaster assistance[C]: Ineligible individuals:
12,694;
Crop subsidy and disaster assistance[C]: Ineligible payments: 49.9;
Conservation[D]: Ineligible individuals: 5,334;
Conservation[D]: Ineligible payments: 10.3.
Percent of income: Non-Farm: Joint tax returns: 80;
Percent of income: Farm: Joint tax returns: 20;
Direct[A] (Non-Farm income): Ineligible individuals: 14,996;
Direct[A] (Non-Farm income): Ineligible payments: 52.1;
Direct[B] (farm income): Ineligible individuals: 35;
Direct[B] (farm income): Ineligible payments: 0.6;
Crop subsidy and disaster assistance[C]: Ineligible individuals:
14,996;
Crop subsidy and disaster assistance[C]: Ineligible payments: 58.5;
Conservation[D]: Ineligible individuals: 6,311;
Conservation[D]: Ineligible payments: 12.3.
Percent of income: Non-Farm: Joint tax returns: 90;
Percent of income: Farm: Joint tax returns: 10;
Direct[A] (Non-Farm income): Ineligible individuals: 17,418;
Direct[A] (Non-Farm income): Ineligible payments: 60.4;
Direct[B] (farm income): Ineligible individuals: 33;
Direct[B] (farm income): Ineligible payments: 0.6;
Crop subsidy and disaster assistance[C]: Ineligible individuals:
17,418;
Crop subsidy and disaster assistance[C]: Ineligible payments: 67.4;
Conservation[D]: Ineligible individuals: 7,274;
Conservation[D]: Ineligible payments: 13.9.
Percent of income: Non-Farm: Joint tax returns: 100;
Percent of income: Farm: Joint tax returns: 0;
Direct[A] (Non-Farm income): Ineligible individuals: 19,912;
Direct[A] (Non-Farm income): Ineligible payments: 68.7;
Direct[B] (farm income): Ineligible individuals: 38;
Direct[B] (farm income): Ineligible payments: 0.6;
Crop subsidy and disaster assistance[C]: Ineligible individuals:
19,912;
Crop subsidy and disaster assistance[C]: Ineligible payments: 76.5;
Conservation[D]: Ineligible individuals: 8,262;
Conservation[D]: Ineligible payments: 15.8.
Single tax returns;
Direct[A] (Non-Farm income): Ineligible individuals: 3,594;
Direct[A] (Non-Farm income): Ineligible payments: $12.9;
Direct[B] (farm income): Ineligible individuals: 8;
Direct[B] (farm income): Ineligible payments: $0.2;
Crop subsidy and disaster assistance[C]: Ineligible individuals: 3,594;
Crop subsidy and disaster assistance[C]: Ineligible payments: $14.0;
Conservation[D]: Ineligible individuals: 1,552;
Conservation[D]: Ineligible payments: $3.3.
Source: GAO analysis of USDA and IRS data.
Notes: Analysis is based on the 1.1 million individuals who received
farm program payments and filed single and joint tax returns as the
primary filer in 2006.
[A] Individuals are ineligible for direct payments under the Direct and
Counter-Cyclical Payments Program if their Non-Farm income exceeds
$500,000.
[B] Individuals are ineligible for direct payments under the Direct and
Counter-Cyclical Payments Program if their farm income exceeds
$750,000.
[C] Individuals are ineligible for these payments if their Non-Farm
income exceeds $500,000. These payments include counter-cyclical
payments under the Direct and Counter-Cyclical Payments Program as well
as payments under the Marketing Assistance Loan Program and crop
disaster programs. Excludes direct payments.
[D] Individuals are ineligible for these payments if their Non-Farm
income exceeds $1 million and less than 66.66 percent of their AGI is
derived from farm income. Includes payments under the Conservation
Reserve Program, Environmental Quality Incentives Program, and
Conservation Security Program.
[End of table]
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.
[End of section]
Appendix II: Comments from the U.S. Department of Agriculture:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
USDA:
United States Department of Agriculture:
Farm and Foreign Agricultural Services:
Farm Service Agency:
Operations Review and Analysis Staff:
1400 Independence Ave, SW:
Stop 0540:
Washington, DC:
20250-0501:
To: Lisa Shames, Director:
Natural Resources and Environment:
Government Accountability Office:
From:
Signed by: Teresa C. Lasseter:
October 9, 2008:
Administrator:
Subject: Responding to U.S. Government Accountability Office (GAO)
Draft Report: GAO-08-1083, "Federal Farm Programs: USDA Needs to
Strengthen Controls to Prevent Payments to Individuals Who Exceed
Income Eligibility Limits."
See comment 1.
The following are general comments in response to the draft report. The
Farm Security and Rural Investment Act of 2002 required the
implementation of the $2.5 million average Adjusted Gross Income (AGI)
limitation. This was the first instance of an actual income means test
applied as eligibility criteria for the receipt of benefits under the
majority of programs administered by FSA. Under this provision, an
individual or entity with an average AGI in excess of $2.5 million for
the three years prior to the year for which benefits were requested was
ineligible for payments, unless 75 percent or more of the AGI was
derived from farming, ranching and forestry operations as defined by
regulation.
Participants were required to certify compliance with the AGI provision
by either submitting a certification statement as provided by FSA, or a
statement from either a CPA or an attorney that certified the
individual or entity complied with the AGI limitation. FSA was granted
the authority to request tax information filed by the individual or
entity in the event the certification was questioned. Requiring three
year of tax returns initially from over 2 million program participants
was not a viable option or cost effective alternative, nor was it the
intent of Congress as a means of certification.
A GAO study was recently conducted of FSA's implementation of the $2.5
million AGI limitation. The GAO auditors had a distinct advantage over
FSA to determine producer compliance and potential payments to
producers that were non-compliant in that GAO had access to IRS tax
payer data. FSA does not have that privilege, clearance or resource
capability to conduct that type of scrutiny of AGI certifications for
every participant. While GAO faults FSA by stating that it lacked
adequate management controls to prevent payments to individuals that
may have exceeded the AGI limitation, FSA noted a number of times
during this study the Agency made the best use of the resources
available.
See comment 2.
Out of $16B that FSA issues to farmers annually, GAO found that
payments issued directly or indirectly to individuals that, according
to IRS data exceeded the AGI limitation in any of the years reviewed,
amounted to only 0.08 percent of that annual total. Furthermore, not
all of the more than 80 programs listed in Table II which comprised
this $16B total in payments were subject to the AGI limitation.
See comment 3.
GAO also faulted FSA by not having implemented a measurable standard
for the contribution of active personal management by a participant for
meeting the requirements of actively engaged in farming. The
requirements for actively engaged in farming are not part of AGI, nor
is AGI compliance dependent upon meeting such requirements. We do not
believe it is appropriate to make reference to an audit that was
completed and finalized over 4 years ago. It was made clear during the
exit conference that any discussions of actively engaged in farming are
misplaced in this study. Also, actively engaged in farming is not a
requirement for the receipt of payments and benefits under the majority
of the programs listed by GAO in Table II.
See comment 4.
GAO revisited another finding from a 2004 audit in which FSA's
procedure for the selection of farming operations for annual payment
limitation compliance reviews was faulted for not being a statistically
sound sample. It was explained that this sample was not represented to
be a statistical sample. Rather, it is a judgmental sampling process
originally fashioned by the Office of the Inspector General (OIG) and
based on criteria to identify the operations most likely to have
potential compliance errors. Nonetheless, as it was again noted in a
recent response to GAO, the 2006 selection process was modified to
eliminate repeat selections, and a statistical sampling process
currently in use by FSA for other compliance purposes is under
consideration for the 2008 selection process.
See comment 5.
During the fours years of this study, GAO found a total of 2,702
individuals that received program benefits and that had an average AGI
that exceeded $2.5 million. Of this four- year total, almost half of
these individuals received the payments indirectly as a member of an
entity. The entity was the program participant and payment recipient,
not the individual directly. What GAO fails to mention is that when the
entity is AGI compliant, and an interest holder is not AGI compliant,
the entity is eligible to receive a payment, but the payment reduced by
the share held by that interest holder. However, through attributing a
share of recorded payments to that non-AGI compliant interest holder,
it appears that a payment was issued to that interest holder.
See comment 6.
GAO also found that 78 percent of the AGI non-compliant individuals
that received program payments lived in or near a metropolitan area and
the remaining 22 percent resided in rural areas, small towns, and
elsewhere. We fail to see the relevance of this finding as it most
likely mirrors the demographics of the general population regardless of
income, occupation, or status as a farm program participant. We trust
that it is not an inference about truthfulness in AGI self-
certification, and where the participants reside.
See comment 7.
The GAO report included examples found of payments issued to prominent
and perceived wealthy individuals even though the individuals may or
may not have certified to be AGI compliant. The first two examples were
of a former insurance company executive and a part-owner of a
professional sports franchise that each received substantial payments
in the years 2003 through 2006 under programs subject to AGI
provisions. GAO failed to mention whether the payments were issued
directly or indirectly through entities, and, if through entities,
whether the payments to the entities were subject to a commensurate
reduction for the interests held by the individuals.
See comment 8.
The third example was that of a foreign individual who received a total
of $80,000 indirectly through two entities during the years 2003, 2005,
and 2006. GAO failed to mention whether these payments were under
programs subject to AGI or the foreign person rules, or if commensurate
reductions were applied to the payments issued to the entities. The
hurricane disaster relief and other disaster programs that compensated
for losses and property rehabilitation for those years were not subject
to the foreign person rules and certain payments were not subject to
the AGI provisions either.
See comment 8.
The fourth example was that of an executive of a major financial
services firm who received $60,000 directly in 2003 program payments.
GAO failed to mention if this was under a long-term conservation
practice agreement or contract, which, if approved prior to the
enactment of the AGI limitation in 2003, would not be subject to AGI.
The amount could also have been received for disaster assistance for
that year which also, was not subject to the $2.5 million AGI
limitation.
See comment 8.
For the fifth and last example, the same reasons apply as in the fourth
example. GAO inappropriately categorized and termed the $900,000 as a
farm program payment. This appears to be commodity certificate exchange
gains which are not program payments issued by FSA. Certification
exchange gains are simply a monetary value realized by the individual
as the result of the transaction.
See comment 8.
GAO explains in detail occurrences where program payments were issued
directly and indirectly to individuals that appeared to be noncompliant
with the AGI limitation, as well as the amounts of program benefits
issued to them during the 4 year period of the study. GAO refers to
these payments as "potentially improper payments". FSA recommends that
the discussion contained in Footnote 7 (Page 4) be more visibly
included in the general text of the report. GAO notes the reason these
payments are termed as "potentially improper" is that their analysis
does not show that any one individual is ineligible for payment.
Furthermore, if other available forms and information had been
evaluated, the income may have decreased the individuals' AGI below the
amounts calculated by GAO and thus, make the individuals eligible for
program payments. USDA regulations allows for the consideration of such
information and the subsequent adjustments in the determination of the
average AGI.
See comment 9.
Of particular importance to FSA is the finding that over 2,700
individuals were noncompliant with the AGI limitation during the 4
years reviewed and were recipients of over $49 million in program
payments during that period of time. Over 2,600 of these individuals
had certified to FSA to be compliant with AGI. Furthermore, there were
87 payment recipients that received program payments subject to AGI
during that time even though they had certified to be noncompliant with
AGI and the subsidiary files were set to preclude the issuance of
payments subject to AGI to these individuals. GAO maintains that
details cannot be disclosed to the FSA due to Section 6103 of the
Internal Revenue Code which prohibits the disclosure of tax return
information. It is imperative to maintain program integrity that
details of not only the 87 individuals be disclosed, but also for the
remainder of the 2,700 individuals. GAO has knowledge of over 2,600
individuals that may have misrepresented their eligibility status to
FSA, and as a result, received "potentially improper" program payments.
GAO has knowledge of 87 individuals that received program payments even
though GAO contends they were clearly not eligible for such payments.
FSA hereby requests the authority by whatever means necessary,
including Congressional authority, to gain access to this specific data
to enable FSA to initiate any actions deemed appropriate upon further
evaluation. Otherwise, the real value and true purpose of this report
is at best questionable.
See comment 8.
Overall, the GAO study focused only on the perceived results of the
implementation of the AGI limitation rather than the stated intent of
the audit: FSA's implementation of the AGI limitation. It is assumed
that GAO extensively reviewed the 2002 Act that gave rise to the AGI
limitation; the regulations promulgated by CCC for the AGI limitation;
the definition developed for the determination of AGI for individuals,
corporations, non- profits and charitable organizations which may or
may not be required to file tax returns; trusts, estates, and all FSA
field offices; and the information provided to the general public.
However, no mention or statements are made in the report if the
implementation and subsequent actions of FSA in regard to AGI met the
intent of Congress.
See comment 10.
Recommendation for Executive Action:
GAO recommends that the Secretary and the FSA Administrator actively
pursue in coordination with the Internal Revenue Service the
development of a system to be used in the verification of income
eligibility for all recipients of farm program payments. Additionally,
if the Secretary determines there is no current authority for the
development of such a system, it is recommended that authority for such
a system be requested from Congress.
We agree with this recommendation as this appears to be the best manner
in which to ensure positive compliance with any AGI limitation or
income means test that may be imposed by Congress for the receipt of
farm program benefits.
USDA requests that GAO, in its final report of this audit, formally
request from the United States Senate, Committee on Finance, that
authority be given to FSA for access to tax data held by the Internal
Revenue Service (IRS) to be used for AGI compliance determination
purposes.
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.[Footnote 19]
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.[Footnote 20]
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.
[End of section]
Appendix III: U.S. Department of Agriculture Farm Program Payments by
Program or Payment Type, Fiscal Years 2003-2006:
Table 5:
Program or payment name: Agricultural Management Assistance Program;
2003: $3,549,373;
2004: $8,783,305;
2005: $7,279,695;
2006: $2,333,998;
Total: $21,946,371.
Program or payment name: American Indian Livestock Feed Program;
2003: 0;
2004: 0;
2005: 473,247;
2006: 7,376,094;
Total: 7,849,341.
Program or payment name: Bioenergy Program;
2003: 148,137,098;
2004: 150,436,473;
2005: 99,076,283;
2006: 57,400,527;
Total: 455,050,381.
Program or payment name: Commodity certificate exchange gains[A];
2003: 185,219,153;
2004: 337,296,134;
2005: 330,138,042;
2006: 210,263,930;
Total: 1,062,917,259.
Program or payment name: Conservation Reserve Program;
2003: 1,770,210,297;
2004: 1,808,271,945;
2005: 1,973,549,573;
2006: 1,686,117,516;
Total: 7,238,149,331.
Program or payment name: Conservation Security Program;
2003: 0;
2004: 179,485,573;
2005: 593,563,202;
2006: 142,088,837;
Total: 915,137,612.
Program or payment name: Cottonseed Payment Program;
2003: 49,834,565;
2004: 14,588;
2005: 0;
2006: 1,645;
Total: 49,850,798.
Program or payment name: Counter-cyclical payments;
2003: 1,746,682,529;
2004: 805,809,924;
2005: 3,008,760,716;
2006: 3,954,423,534;
Total: 9,515,676,703.
Program or payment name: Crop disaster programs[B];
2003: 2,035,849,601;
2004: 748,959,493;
2005: 2,881,168,505;
2006: 147,655,261;
Total: 5,813,632,860.
Program or payment name: Dairy Market Loss Assistance Program[C];
2003: 1,204,615;
2004: 600,054;
2005: 337,566;
2006: 7,094,864;
Total: 9,237,099.
Program or payment name: Direct payments;
2003: 4,149,832,019;
2004: 5,289,336,282;
2005: 5,686,444,172;
2006: 4,558,939,310;
Total: 19,684,551,783.
Program or payment name: Emergency Conservation Program;
2003: 44,760,627;
2004: 22,177,233;
2005: 57,934,232;
2006: 86,618,801;
Total: 211,490,893.
Program or payment name: Emergency Livestock Feed Assistance Program;
2003: (41,485);
2004: 100,326,373;
2005: (148,398);
2006: 4,123,078;
Total: 104,259,568.
Program or payment name: Environmental Quality Incentives Program[D];
2003: 545,495,052;
2004: 790,482,178;
2005: 465,584,695;
2006: 415,334,213;
Total: 2,216,896,138.
Program or payment name: Grassland Reserve Program;
2003: 0;
2004: 1,348,981;
2005: 2,835,751;
2006: 5,913,591;
Total: 10,098,323.
Program or payment name: Grassroots Source Water Protection Program;
2003: 0;
2004: 0;
2005: 3,191,760;
2006: 0;
Total: 3,191,760.
Program or payment name: Hard white wheat incentive payments;
2003: 0;
2004: 9,023,427;
2005: 3,166,216;
2006: 5,094,077;
Total: 17,283,720.
Program or payment name: Karnal bunt fungus compensation payments;
2003: 3,022,159;
2004: 0;
2005: 0;
2006: 0;
Total: 3,022,159.
Program or payment name: Lamb Meat Adjustment Assistance Program;
2003: 17,586,607;
2004: 5,395,203;
2005: 14,773,899;
2006: 36,054;
Total: 37,791,763.
Program or payment name: Livestock Compensation Program[E];
2003: 1,203,319,891;
2004: (463,156);
2005: 70,440,660;
2006: 213,533,953;
Total: 1,486,831,348.
Program or payment name: Loan deficiency payments[F];
2003: 666,181,783;
2004: 457,310,464;
2005: 4,258,016,314;
2006: 3,896,456,928;
Total: 9,277,965,489.
Program or payment name: Market Access Program;
2003: 95,485,882;
2004: 124,004,633;
2005: 33,542,876;
2006: 0;
Total: 253,033,391.
Program or payment name: Marketing loan gains;
2003: 189,552,996;
2004: 114,572,970;
2005: 384,974,403;
2006: 246,292,577;
Total: 935,392,946.
Program or payment name: Milk Income Loss Contract payments;
2003: 1,220,761,113;
2004: 220,703,830;
2005: 7,308,438;
2006: 345,843,432;
Total: 1,794,616,813.
Program or payment name: Milk Income Loss Transition Program;
2003: 559,861,054;
2004: 6,843,823;
2005: 1,850,455;
2006: 412,035;
Total: 568,967,367.
Program or payment name: Noninsured Assistance Program[G];
2003: 237,573,500;
2004: 122,717,376;
2005: 107,896,616;
2006: 64,781,316;
Total: 532,968,808.
Program or payment name: Peanut Quota Buyout Program;
2003: 1,220,317,818;
2004: 24,989,195;
2005: 22,302,136;
2006: 21,201,291;
Total: 1,288,810,440.
Program or payment name: Soil and Water Agricultural Assistance
Program;
2003: 2,694,734;
2004: 1,859,399;
2005: 1,138,084;
2006: 719,832;
Total: 6,412,049.
Program or payment name: Sugarcane Payment Program;
2003: 0;
2004: 55,800,000;
2005: (1,569);
2006: 0;
Total: 55,798,431.
Program or payment name: Tobacco Transition Payment Program[H];
2003: 51,120,568;
2004: 4,501;
2005: (341);
2006: 0;
Total: 51,124,728.
Program or payment name: Trade Adjustment Assistance for Farmers;
2003: 0;
2004: 9,739,427;
2005: 14,669,796;
2006: 2,578,164;
Total: 26,987,387.
Program or payment name: Tree Assistance Program;
2003: 0;
2004: 1,764,917;
2005: 3,549,270;
2006: 4,981,844;
Total: 10,296,031.
Program or payment name: Wetlands Reserve Program;
2003: 21,572,999;
2004: 18,094,066;
2005: 9,438,694;
2006: 7,610,100;
Total: 56,715,859.
Program or payment name: Wildlife Habitat Incentives Program;
2003: 2,265,957;
2004: 13,994,413;
2005: 14,154,645;
2006: 9,124,686;
Total: 39,539,701.
Program or payment name: Refunds of farm program payments made before
2003[I];
2003: (292,867,811);
2004: (8,828,137);
2005: (2,663,318);
2006: (248,116);
Total: (304,607,382).
Program or payment name: Other programs[J];
2003: 34,813,627;
2004: 45,874,190;
2005: 182,899,792;
2006: 91,320,530;
Total: 354,908,139.
Program or payment name: Total;
2003: $15,913,996,321;
2004: $11,466,729,077;
2005: $20,237,646,107;
2006: $16,195,423,902;
Total: $63,813,795,407.
Source: GAO analysis of Farm Service Agency data.
Notes: (1) Table includes programs and payments subject to the AGI
provisions as well as those not subject to the AGI provisions. (2) For
commodity certificate exchange gains and payments made under the
Marketing Assistance Loan Program through cooperative marketing
associations, we used program year data. (3) Totals may not add due to
rounding. (4) Negative payments represent receivables due to
overdisbursements and other payment anomalies in a prior year.
[A] Includes cotton user marketing certificate gains.
[B] 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.
[C] Includes the Dairy Indemnity Program, Dairy Options Pilot Program,
and Dairy Market Loss Assistance Program.
[D] Includes the Environmental Quality Incentives Program and the
Automated Conservation Program Environmental Long Term payments.
[E] Includes the Livestock Assistance Program, Livestock Indemnity
Program, Avian Influenza Indemnity Program, 2002 Cattle Feed Program,
Pasture Flood Compensation Program, and Pasture Recovery Program.
[F] Includes the Acreage Grazing Payments Program.
[G] Includes supplemental appropriations for the Noninsured Assistance
Program.
[H] Includes the Tobacco Loss Assistance Program and Supplement Tobacco
Loss Assistance Program.
[I] Includes market loss assistance payments and production flexibility
contract payments.
[J] 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.
[End of table]
[End of section]
Appendix IV: Distribution of Income for Individuals Receiving Farm
Program Payments Compared with All Tax Filers, 2006:
Table 6:
Adjusted gross income: Under $0 (loss) to $0;
Tax returns for individuals receiving farm program payments: Number of
returns: 73,492;
Tax returns for individuals receiving farm program payments: Percent:
6.6;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): $(90.1);
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): $17.2;
Tax returns for all individuals: Number of returns: 2,675,594;
Tax returns for all individuals: Percent: 1.9;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): $(34.1).
Adjusted gross income: $1 to under $5,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 35,639;
Tax returns for individuals receiving farm program payments: Percent:
3.2;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 2.6;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (dollars in thousands): 6.9;
Tax returns for all individuals: Number of returns: 11,633,370;
Tax returns for all individuals: Percent: 8.4;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 2.7.
Adjusted gross income: $5,000 to under $10,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 50,661;
Tax returns for individuals receiving farm program payments: Percent:
4.5;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 7.6;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 6.6;
Tax returns for all individuals: Number of returns: 11,786,747;
Tax returns for all individuals: Percent: 8.5;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 7.5.
Adjusted gross income: $10,000 to under $15,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 58,298;
Tax returns for individuals receiving farm program payments: Percent:
5.2;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 12.5;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 7.0;
Tax returns for all individuals: Number of returns: 11,711,680;
Tax returns for all individuals: Percent: 8.5;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 12.5.
Adjusted gross income: $15,000 to under $20,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 62,797;
Tax returns for individuals receiving farm program payments: Percent:
5.6;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 17.5;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in
in thousands): 7.9;
Tax returns for all individuals: Number of returns: 10,937,694;
Tax returns for all individuals: Percent: 7.9;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 17.5.
Adjusted gross income: $20,000 to under $25,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 56,323;
Tax returns for individuals receiving farm program payments: Percent:
5.0;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 22.5;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 8.9;
Tax returns for all individuals: Number of returns: 9,912,261;
Tax returns for all individuals: Percent: 7.2;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 22.5.
Adjusted gross income: $25,000 to under $30,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 53,858;
Tax returns for individuals receiving farm program payments: Percent:
4.8;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 27.5;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 9.5;
Tax returns for all individuals: Number of returns: 8,749,761;
Tax returns for all individuals: Percent: 6.3;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 27.5.
Adjusted gross income: $30,000 to under $40,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 99,846;
Tax returns for individuals receiving farm program payments: Percent:
9.0;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 34.9;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 10.0;
Tax returns for all individuals: Number of returns: 14,151,824;
Tax returns for all individuals: Percent: 10.2;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 34.8.
Adjusted gross income: $40,000 to under $50,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 94,041;
Tax returns for individuals receiving farm program payments: Percent:
8.4;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 45.0;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 10.4;
Tax returns for all individuals: Number of returns: 10,687,193;
Tax returns for all individuals: Percent: 7.7;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 44.8.
Adjusted gross income: $50,000 to under $75,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 193,446;
Tax returns for individuals receiving farm program payments: Percent:
17.3;
Tax returns for individuals receiving farm program payments:
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 61.9;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 10.3;
Tax returns for all individuals: Number of returns: 18,854,917;
Tax returns for all individuals: Percent: 13.6;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 61.4.
Adjusted gross income: $75,000 to under $100,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 125,646;
Tax returns for individuals receiving farm program payments: Percent:
11.3;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 86.2;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 11.4;
Tax returns for all individuals: Number of returns: 11,140,408;
Tax returns for all individuals: Percent: 8.0;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 86.2.
Adjusted gross income: $100,000 to under $200,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 137,058;
Tax returns for individuals receiving farm program payments: Percent:
12.3;
Tax returns for individuals receiving farm program payments: [Empty];
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 134.4;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 12.0;
Tax returns for all individuals: Number of returns: 12,088,423;
Tax returns for all individuals: Percent: 8.7;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 132.9.
Adjusted gross income: $200,000 to under $500,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 51,424;
Tax returns for individuals receiving farm program payments: Percent:
4.6;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 295.7;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 13.1;
Tax returns for all individuals: Number of returns: 3,121,485;
Tax returns for all individuals: Percent: 2.3;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 286.8.
Adjusted gross income: $500,000 to under $1,000,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 13,280;
Tax returns for individuals receiving farm program payments: Percent:
1.2;
Tax returns for individuals receiving farm program payments: [Empty];
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 686.0;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 13.0;
Tax returns for all individuals: Number of returns: 589,306;
Tax returns for all individuals: Percent: 0.4;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 678.1.
Adjusted gross income: $1,000,000 to under $1,500,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 3,836;
Tax returns for individuals receiving farm program payments: Percent:
0.3;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 1,216.6;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 13.3;
Tax returns for all individuals: Number of returns: 150,431;
Tax returns for all individuals: Percent: 0.1;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 1,210.1.
Adjusted gross income: $1,500,000 to under $2,000,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 1,801;
Tax returns for individuals receiving farm program payments: Percent:
0.2;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 1,723.7;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 14.1;
Tax returns for all individuals: Number of returns: 64,007;
Tax returns for all individuals: Percent: 0.0[B];
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 1,721.9.
Adjusted gross income: $2,000,000 to under $5,000,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 2,818;
Tax returns for individuals receiving farm program payments: Percent:
0.3;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 2,988.8;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 12.6;
Tax returns for all individuals: Number of returns: 98,724;
Tax returns for all individuals: Percent: 0.1;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 2,989.4.
Adjusted gross income: $5,000,000 to under $10,000,000;
Tax returns for individuals receiving farm program payments: Number of
returns: 741;
Tax returns for individuals receiving farm program payments: Percent:
0.1;
Tax returns for individuals receiving farm program payments: [Empty];
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 6,793.4;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 14.1;
Tax returns for all individuals: Number of returns: 24,975;
Tax returns for all individuals: Percent: 0.0[B];
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 6,863.2.
Adjusted gross income: $10,000,000 or more;
Tax returns for individuals receiving farm program payments: Number of
returns: 455;
Tax returns for individuals receiving farm program payments: Percent:
0.0[B];
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): 21,962.0;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in in thousands): 9.1;
Tax returns for all individuals: Number of returns: 15,956;
Tax returns for all individuals: Percent: 0.0[B];
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): 28,357.7.
Adjusted gross income: Total/Average;
Tax returns for individuals receiving farm program payments: Number of
returns: 1,115,460;
Tax returns for individuals receiving farm program payments: Percent:
100.0;
Tax returns for individuals receiving farm program payments: Average
adjusted gross income per return (Dollars in thousands): $92.3;
Tax returns for individuals receiving farm program payments: Average
farm payment per return[A] (Dollars in
in thousands): $10.6;
Tax returns for all individuals: Number of returns: 138,394,754;
Tax returns for all individuals: Percent: 100.0;
Tax returns for all individuals: Average adjusted gross income per
return (Dollars in thousands): $58.0.
Source: GAO analysis of USDA and IRS data, and IRS Statistics of
Income.
Note: Totals may not add due to rounding.
[A] Farm program payments are based on fiscal year 2006 data.
[B] Rounds to zero.
[End of table]
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Lisa Shames (202) 512-3841 or shamesl@gao.gov:
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.
[End of section]
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.
[End of section]
Footnotes:
[1] GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-
235R (Washington, D.C.: Nov. 17, 2006).
[2] GAO, 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); and, 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.: Apr. 30, 2004).
[3] AGI is defined as taxable income from all sources including wages,
salaries, and farm income or losses, minus specific deductions.
[4] For purposes of this report, programs described as subject to AGI
provisions of the 2002 Farm Bill include programs made subject to the
AGI limitations in the 2002 Farm Bill, and programs subject to the same
AGI limitations through subsequent legislation or USDA regulation.
[5] 7 C.F.R. § 1400.602.
[6] Under the 2008 Farm Bill, individuals filing a tax return jointly,
such as a husband and wife, may each qualify for an income limit based
on an allocation of income among the individuals. The farm bill also
provides USDA discretion to waive the conservation payment limit for
"environmentally sensitive land of special significance."
[7] Section 6103 of the Internal Revenue Code generally prohibits the
disclosure of tax return information. An individual's average AGI is
the average of the individual's AGI from the previous 3 tax years
immediately preceding the year the individual applies for farm program
payments. For example, to determine an individual's eligibility for
farm program payments for 2003, USDA averages AGI from tax years 2000,
2001, and 2002.
[8] In this report, we refer to these payments as being "potentially
improper" and not "improper" because our analysis does not allow us to
definitively state that any one individual is ineligible for payments.
Specifically, we analyzed individuals' compliance with the AGI
provisions based on IRS Schedule F and Form 4835, but did not use other
forms and schedules where individuals might report farm income and
losses to IRS. Income on these other forms could increase or decrease
the individuals' AGI above or below the amounts we calculated,
potentially making them eligible for farm program payments. In
addition, we used data as reported on joint tax returns, but
individuals who filed jointly may be eligible to receive farm program
payments after income and losses are allocated among the individuals
filing jointly. This is possible because USDA regulations permit
individuals who file a joint return to certify their income as if they
had filed a separate return.
[9] Payments and benefits not subject to the AGI provisions of the 2002
Farm Bill include those made 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.
[10] The 2008 Farm Bill defines a person as an individual, and
eliminates the three-entity rule, requiring that, for the purpose of
payment limitations, farm payments be attributed to an individual
regardless of whether payments are received directly or through an
entity.
[11] GAO-07-818.
[12] GAO-04-407.
[13] The one state not included is Maine.
[14] We classified tax address zip codes into "Rural Urban Commuting
Area Codes" that group U.S. Census Bureau tracts into four population/
commuting groups: Urban Core, Suburban, Large Town, and Small Town/
Isolated Rural Areas. Percentages are based upon the combined Urban
Core and Suburban areas and the combined Large Town and Small Town/
Isolated Rural Areas.
[15] GAO-04-407.
[16] Section 199 of the Internal Revenue Code allows certain taxpayers
to claim a deduction for a percentage of their net income from
qualified domestic production activities. In 2005 and 2006 that
percentage was 3 percent. The deduction percentage increases to 6
percent for 2007 through 2009 and to 9 percent beginning in 2010.
[17] 73 Fed. Reg. 40,283 (July 14, 2008).
[18] We refer to these payments as being "potentially improper" and not
"improper" because our analysis does not allow us to definitively state
that any one individual is ineligible for payments. Specifically, we
analyzed individuals' compliance with the AGI provisions based on IRS
Schedule F and Form 4835, but did not use other forms and schedules
where individuals might report farm income and losses to IRS. Income on
these other forms could increase or decrease the individuals' AGI above
or below the amounts we calculated, potentially making them eligible
for farm program payments. In addition, we used data as reported on
joint tax returns, but individuals who filed tax returns jointly may be
eligible to receive farm program payments after income and losses are
allocated among the individuals filing jointly. This is possible
because USDA regulations permit individuals who file a joint return to
certify their income as if they had filed a separate return.
[19] GAO, 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.: Apr. 30, 2004).
[20] GAO-04-407.
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Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
