Understanding Payment Limitation and Crop Insurance Audits

Use the word “audit” and most people think of the Internal Revenue Service. Since farmers receive subsidies from the federal government, they are also involved in audits from those government programs. Payment limitation audits from the Farm Service Agency and Crop Insurance Audits are two potential audits for farmers.

FSA End of Year Reviews

Although the Farm Service Agency calls them “End of Year Reviews”, it can be thought of as a payment limitation audit. “FSA conducts end of year reviews to maintain the integrity of payment and eligibility limitation provisions” says Bryan Olschlager, Program Director of the Compliance Department at North Dakota FSA. “Much of what FSA does is based on producer certifications” says Olschlager. When a producer signs up for the 2009 farm program, a CCC-902 Farm Operating Plan is required. The operator must tell FSA from where the operation gets capital, land, equipment, labor and management. The end of the year review is to ensure that what was certified on the 902, is what actually happened on the operation during the year.

The majority of the farms selected for the review are chosen by the national office. The national office may select farms using criteria such as a farming operation that has just been restructured, or if the partners are involved in more than one operation, or it may be just a completely random selection. The state and county offices may also select farms for review if they have reason to believe the farm operating plan was not followed.

When selected for an end of year review, the producer will receive a letter with a list of required documents to support the farm plan. Some sample requirements include loan documents, canceled checks for labor and operating expenses, equipment listings, lease agreements and tax returns to prove you meet the adjusted gross income eligibility. Although the list is long, remember the farm must verify labor, management, capital, land and equipment, which are all requirements of the CCC- 902 form that was signed. The information must be provided to the county office with 30 days.

Once the producer has provided the complete file, the county office will make three copies; one to keep for themselves, and two to forward onto a review team. “The review team consists of two FSA employees, whether it is a county director, or a program technician with a background in payment limitations” says Olschlager. “When we assign those files to a review team, the team is not from the local county, or a neighboring county. It is someone objective with no knowledge of the operation and no preconceived notions.”

The review team makes a recommendation to the local county office, but it is ultimately up to the local County Committee to determine if the initial determinations were correct. If the farm is found in violation of payment limitation provisions, it could lose payments for that year. If FSA determines the producer adopted a “scheme or device” it will lose payments for that year(s) plus one additional year. Criminal charges are always possible, but very rare. Discrepancies may be identified, but if determined minor in nature (i.e. – would not affect the initial determinations), an adverse determination would not be the result. Olschlager offered an example of labor. “In the spring a farmer may certify he is going to provide 100% of the labor, but during the year he hires an employee.” Although the farm operation plan changed from the spring certification, the farm could easily remain within the guidelines of payment limitation rules providing the farmer still contributed significant labor to the farming operation.

The direct payment limits for 2009 are $40,000 per farmer, and it is FSA’s job to make sure that only farmers are receiving those payments.

Crop Insurance Audits

In 2008, many farmers were audited by crop insurance because of the large size of claims. If you had a revenue product, such as Revenue Assurance, and you also had a production loss, the combination of low prices and low yields caused indemnity payments to trigger an automatic audit.

“It was the worst year since 1988 as far as drought” says Stuart Dilse who farms near Scranton, ND. “We had some rain in June and things were green for a little bit, but that’s all the rain we saw.” When you mix low yields with high price guarantees, many farmers in Western North Dakota easily hit the $100,000 per crop per county trigger. Once you hit $500,000, even the adjusters get audited.

For the audit you must prove your yields for the past three years to substantiate your APH. This is the most time consuming process for the farmer and auditor, but there is an incentive for the farmer to finish the audit quickly. No indemnity payments will be paid until the review is complete. Even though a farmer would much rather be out in the field harvesting the next crop, or getting field work done, you cannot collect the insurance check until the review is over. Dilse felt the review process did go fairly quickly for 2008. “We finished harvesting wheat at the end of August, and we had our checks in mid-October. It went fairly well considering the number of claims.”

There is some reprieve for farmers who collect crop insurance in 2009. If you purchase a revenue insurance product, and you collect an indemnity because of crop losses, and price movements, each side of the equation will have a separate $100,000 limit. With the potential for large price swings, this new rule could save many farmers, and insurance companies, the hassle of auditing a claim.

With Uncle Sam providing subsidies federal crop insurance and direct payments through the Farm Service Agency, accountability is required. Although the audits can be burdensome and frustrating, they do help maintain integrity in the program. If you are found in violation, there is an appeals process for both the Farm Service Agency and the Risk Management Agency.