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. 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. 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. 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. 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. 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. 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. 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. 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.
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, 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.