oversight

Food Stamp Program: Storeowners Seldom Pay Financial Penalties Owed for Program Violations

Published by the Government Accountability Office on 1999-05-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Chairman, Committee on
                 Agriculture, Nutrition, and Forestry, U.S.
                 Senate


May 1999
                 FOOD STAMP
                 PROGRAM
                 Storeowners Seldom
                 Pay Financial Penalties
                 Owed for Program
                 Violations




GAO/RCED-99-91
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-282030

                   May 11, 1999

                   The Honorable Richard G. Lugar
                   Chairman, Committee on Agriculture,
                     Nutrition, and Forestry
                   United States Senate

                   Dear Mr. Chairman:

                   In 1998, the Food and Nutrition Service (FNS) of the U.S. Department of
                   Agriculture (USDA) provided about $17 billion in Food Stamp Program
                   benefits to about 20 million recipients. Recipients purchase allowable food
                   with their food stamp benefits—either through coupons or
                   electronically—at about 185,000 authorized food stores. Each year,
                   storeowners who violate various Food Stamp Program regulations are
                   assessed millions of dollars in penalties as part of FNS’ efforts to maintain
                   the program’s integrity.

                   To assess the role that FNS’ management of these financial penalties plays
                   in maintaining the integrity of the Food Stamp Program, you asked us to
                   (1) identify the dollar amount of the financial penalties, collections, and
                   debt reductions (waivers, adjustments, or write-offs) affecting
                   storeowners violating program regulations during fiscal year 1993 through
                   fiscal year 1998; (2) determine the effectiveness of FNS’ procedures and
                   practices for assessing financial penalties against storeowners for program
                   violations; and (3) determine the effectiveness of FNS’ procedures and
                   practices for collecting financial penalties levied against storeowners.


                   Over the past 6 years, the Food and Nutrition Service and the courts have
Results in Brief   assessed or levied about $78 million in financial penalties and interest
                   against storeowners for violating Food Stamp Program regulations. The
                   penalties and interest are recorded as debts in the agency’s accounting
                   records. During this period, the Food and Nutrition Service and the courts
                   collected $11.5 million, or about 13 percent of the total penalties, and the
                   agency reduced the amount owed by storeowners by about $49 million, or
                   about 55 percent, through waivers, adjustments, or write-offs. The dollar
                   amount of penalty debt outstanding at the end of the year more than
                   doubled, from $12.3 million in 1993 to $28.2 million in 1998.

                   In seven Food and Nutrition Service field offices, we reviewed 259 USDA
                   undercover investigations that identified program violations, and we found




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             that the Food and Nutrition Service almost always assessed financial
             penalties against storeowners when warranted. However, other
             storeowners who may have violated program regulations and could have
             been penalized were not identified. The agency is not effectively using
             data on the electronic redemption of food stamp benefits to identify these
             storeowners.

             Agency officials noted that the small percentage of debt collected
             reflected, in part, the difficulties involved in collecting this type of debt,
             including problems in locating debtors and their refusal to pay. However,
             weaknesses in the agency’s debt collection procedures and practices also
             have contributed to low collections. For example, the Food and Nutrition
             Service has not aggressively collected debt, consistently assessed interest
             on unpaid debt, and written off uncollectible debt in a timely manner.
             Furthermore, the agency has not yet referred any delinquent debt to the
             Department of the Treasury, which could deduct the debt from any future
             federal payments due the storeowners. The Food and Nutrition Service
             expects to soon be in a position to make such referrals as it completes the
             implementation of the provisions of the Debt Collection Improvement Act
             of 1996. This law makes the Department of the Treasury primarily
             responsible for collecting debts delinquent for over 180 days. We are
             making a number of recommendations to the Secretary of Agriculture for
             improving the Food and Nutrition Service’s debt collection activities.


             FNS administers the Food Stamp Program in partnership with the states. It
Background   funds all of the program’s food stamp benefits and about 50 percent of the
             states’ administrative costs. FNS is primarily responsible for developing the
             program’s policies and guidelines, authorizing retail food stores to
             participate in the program, and monitoring storeowners’ compliance with
             the program’s requirements. Its 58 field offices assess financial penalties
             against storeowners who violate program regulations.1 In addition, federal,
             state, and local court actions can result in financial penalties against
             storeowners. Storeowners violate the program’s requirements when they
             accept food stamps for nonfood items such as paper towels, accept food
             stamp benefits when they are not authorized to participate in the program,
             or traffick in food stamp benefits.2 FNS’ seven regional offices are

             1
              Food stamp state agencies establish debts against program recipients to recover benefits they receive
             in excess of the level that was appropriate. FNS officials stated that debt owed by recipients is
             approximately 95 percent of the agency’s accounts receivable.
             2
              Trafficking is the exchange of food stamp benefits for cash and other major noneligible food items
             instead of for allowable food products. See Food Stamp Program: Information on Trafficking Food
             Stamp Benefits (GAO/RCED-98-77, Mar. 26, 1998).



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responsible for collecting the financial penalties and related interest
charges, which are recorded as debts in FNS’ accounting records.

The states are responsible for handling the day-to-day operation and
management of the program, including conducting such duties as
certifying the eligibility of individuals or households to participate in the
program, delivering benefits to recipients, and monitoring recipients’
compliance with the program’s requirements.

Recipients use food stamp coupons or an electronic benefits transfer card
to pay for allowable foods. Food stamp electronic systems use the same
electronic fund transfer technology that many grocery stores use for their
debit card payment systems. After a food stamp recipient receives a card
and a personal identification number, the recipient purchases food by
authorizing the transfer of the food stamp benefits from a federal account
to a retailer’s account. At the grocery checkout counter, the recipient’s
card is run through an electronic reader, and the recipient enters a
personal identification number to access the food stamp account.

The Personal Responsibility and Work Opportunity Reconciliation Act of
1996 mandates that all states implement electronic benefits transfer
systems by October 1, 2002, unless the USDA waives the requirement. As of
October 1998, 26 states had implemented electronic systems statewide.
Additionally, the District of Columbia is operating a District-wide
electronic system. The remaining states are in various stages of
implementing electronic systems. Collectively, electronic systems supplied
about 47 percent of all food stamp benefits in 1998.

Federal agencies’ debt collection policies, practices, and procedures are
based on legislation, regulations, and direction from the Office of
Management and Budget (OMB). The principal statutes are the Federal
Claims Collection Act of 1966, the Debt Collection Act of 1982, and the
Debt Collection Improvement Act of 1996. The applicable regulations are
principally the Federal Claims Collection Standards and departmental
regulations. These statutes and regulations establish mandatory
requirements for federal agencies to follow. OMB Circular No. A-129
describes management direction for federal debt collection.




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                                          During fiscal year 1993 through fiscal year 1998, FNS’ assessments and
Financial Penalties                       court actions resulted in $72.7 million in financial penalties and
Levied, Collected, or                     $5.0 million in interest against storeowners for violating the Food Stamp
Written Off During                        Program’s regulations. Furthermore, FNS and the courts collected
                                          $11.5 million from storeowners, and FNS waived, adjusted, or wrote off
Fiscal Year 1993                          $49 million.3 (See table 1.)
Through Fiscal Year
1998


Table 1: Financial Penalties Levied and Collected, and Debt Reduced by Other Means, Fiscal Years 1993-98
Dollars in millions
                       Balance at
                     beginning of                      Interest added           Collection of      Other reductions          Balance at end of
Fiscal year            fiscal year   New penalties        to penalties             penalties         of penalty debt               fiscal year
1993                         $11.0            $11.5                $0.5                    $1.8                    $9.0                 $12.3
1994                          12.3               9.0                0.4                     1.6                        4.6                 15.4
1995                          15.4              25.5                1.3                     1.8                    15.0                    25.3
1996                          25.3              10.0                0.9                     1.9                        9.3                 25.0
1997                          25.0               7.8                1.0                     2.4                        7.1                 24.4
1998                          24.4               8.9                0.9                     2.0                        4.0                 28.2
Total                                         $72.7                $5.0                  $11.5                   $49.0
Average                                       $12.1                $0.8                    $1.9                    $8.2                 $21.8
                                          Note: Other reductions of debt can be waivers, adjustments, or write-offs.

                                          Source: FNS’ data.



                                          Table 1 shows the following for the 6-year period, fiscal year 1993 through
                                          fiscal year 1998:

                                          FNS and the courts collected only a small percentage of the financial
                                          penalties assessed against storeowners. During the 6-year period, the total
                                          penalties were $88.7 million, but they collected only $11.5 million, or about
                                          13 percent.

                                          FNS reduced storeowners’ penalty debt through adjustments, waivers, or
                                          write-offs by several times the dollar amount of debt that it collected


                                          3
                                           Some storeowner debt is collected through court-administered and -supervised processes (court
                                          collections).



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                              annually. For example, debt reductions averaged $8.2 million each year,
                              while collections averaged $1.9 million. According to FNS, adjustments are
                              changes in the amount of the original debt that should have been charged;
                              waivers are relief from some or all of the debt; and write-offs occur when
                              an agency determines that a debt is uncollectible after all appropriate debt
                              collection tools have been used. FNS had large debt reductions because it
                              was unable to collect most of the financial penalties assessed against
                              storeowners.

                              The dollar amount of penalty debt outstanding more than doubled from
                              the end of year fiscal year 1993 to the end of fiscal year 1998 (from
                              $12.3 million to $28.2 million), while the amount of collections increased
                              slightly, from $1.8 million to $2.0 million.


FNS’ Reduction of             As table 1 shows, during fiscal year 1993 through fiscal year 1998, FNS
Financial Penalty Debts       reduced financial penalty debts for storeowners by $49 million. OMB
                              Circular No. A-129 instructs federal agencies to establish effective
                              write-off and closeout procedures for uncollectible accounts in order to
                              permit agencies to focus their efforts on delinquent accounts with the
                              greatest potential for collection. As discussed in greater detail later in this
                              report, FNS has an opportunity to improve its debt collection, which, in
                              turn, could potentially reduce the amount of debt that is written off as
                              uncollectible.4


Types of Financial            FNS’accounts receivable records classify financial penalties against
Penalties Against             storeowners into the following seven types:
Storeowners
                          •   Retailer/wholesaler fine—unauthorized use. A storeowner not authorized
                              to participate in the program accepts and/or redeems food stamp benefits.
                          •   Civil money penalty—transfer of ownership. A storeowner transfers
                              ownership of a store during a period when the storeowner was disqualified
                              from the program.
                          •   Court-ordered restitution. A storeowner misused food stamps, and federal,
                              state, or local court actions imposed a financial penalty.
                          •   Retailer/wholesaler fiscal claim. A storeowner misused food stamps by, for
                              example, selling nonfood items to program recipients.
                          •   Civil money penalty—hardship. A storeowner is allowed to remain in the
                              program in lieu of disqualification when removing the store would cause


                              4
                               As discussed in app. I, we did not evaluate the merits of the write-offs.



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                                            program recipients a hardship because of the unavailability of authorized
                                            stores in a given area.
                                        •   False Claims Act penalty. A storeowner submitted a false claim against the
                                            federal government and must pay a penalty under the False Claims Act.
                                            Such penalties usually involve storeowners caught trafficking who are not
                                            criminally prosecuted.
                                        •   Civil money penalty—trafficking. If a clerk is caught trafficking and the
                                            owner and store management were not involved, the owner can remain in
                                            the Food Stamp Program by agreeing to pay a financial penalty.

                                            As of September 30, 1998, storeowners owed FNS about $28.2 million in
                                            financial penalties. Table 2 shows the amount owed for each type of
                                            financial penalty.

Table 2: Types of Financial Penalties
and Amounts Owed FNS, as of                 Dollars in millions
September 30, 1998                                                                                                         Amount owed as of
                                            Type of financial penalty                                                      September 30, 1998
                                            Retailer/wholesaler fine—unauthorized use                                                        $10.3
                                            Civil money penalty—transfer of ownership                                                           7.1
                                            Court-ordered restitution                                                                           6.8
                                            Retailer/wholesaler fiscal claim                                                                    2.2
                                            Civil money penalty—hardship                                                                        1.3
                                            False Claims Act penalty                                                                            0.3
                                            Civil money penalty—trafficking                                                                     0.2
                                            Total                                                                                            $28.2
                                            Source: FNS’ data.




                                            FNS almost always assessed financial penalties, when warranted, against
FNS Almost Always                           storeowners who were identified through undercover investigations as
Penalized Identified                        violating the Food Stamp Program’s regulations.5 However, we found that
Program Violators but                       FNS could have identified additional storeowners who violated program
                                            regulations if it more effectively used data on electronic benefits transfers.
Could Identify More                         FNS has made limited use of this information because it has not developed
Violators With Better                       an effective plan for reviewing and acting on this information, including
                                            designating responsible staff. FNS officials believe that they need more
Use of Electronic                           personnel to analyze the data on stores that are likely to be trafficking.
Data
                                            5
                                             For fiscal year 1997, we reviewed about 90 percent of the reports by the Office of Inspector General
                                            and about 60 percent of the reports by FNS’ Compliance Branch on undercover investigations that
                                            identified program violations by stores located within the seven FNS field offices we visited.



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FNS Almost Always           FNS  followed its procedures for assessing financial penalties in nearly all of
Assessed Financial          the 259 cases we reviewed in which stores were found to have violated
Penalties When Warranted    program regulations. Under its procedures, stores are penalized if the
                            violations meet certain criteria, such as involving more than $100 in
                            program benefits. Of the 259 cases we reviewed, 117 met these criteria,
                            and FNS assessed penalties in 114 of these cases. In the remaining three
                            cases, we found that FNS did not assess financial penalties when we believe
                            it should have, and FNS concurred in our opinion.


FNS Does Not Consistently   Through the use of data on electronic benefits transfers (EBT), FNS
Use Electronic Data to      identifies stores that are probably engaged in trafficking, but it does not
Identify and Penalize       consistently follow up on this information with further analyses to
                            determine whether violations are occurring and to assess penalties.
Program Violators           Greater use of EBT data to identify and penalize storeowners in violation of
                            program regulations would enable FNS to better leverage its enforcement
                            resources.

                            All states using EBT systems must provide their data on food stamp
                            transactions to FNS for analysis. These data include the date, time, and
                            amount of the sale; the store’s authorization number; and the recipient’s
                            identification number. FNS’ computer program analyzes these data and
                            identifies individual electronic transactions or transaction patterns that
                            indicate trafficking may be occurring at a store. Each month, FNS prepares
                            a list of hundreds of stores in each region that appear to be highly likely to
                            be violating program requirements.

                            This analysis of the electronic data offers a breakthrough in combating
                            food stamp fraud, according to the Department’s Office of Inspector
                            General and FNS’ Compliance Branch. Furthermore, the Personal
                            Responsibility and Work Opportunity Reconciliation Act of 1996 provides
                            that FNS may use electronic data alone, without the expense of conducting
                            a labor-intensive undercover investigation, to initiate action—such as
                            removal from the program—against storeowners violating the
                            requirements of the Food Stamp Program.

                            Before FNS staff in field locations can take action against any of the
                            storeowners identified by FNS’ computer system, they must further analyze
                            the data because all the stores on the list may not be engaged in
                            trafficking. They have to consult other databases and documentation to
                            determine whether other factors, such as a store’s sales volume, might
                            have caused the computer system to flag that particular store.



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                      We found that field offices were using these data differently, with some
                      offices providing a more thorough review than others. For example, two
                      field offices further analyzed the data and took administrative action to
                      penalize offending storeowners. However, four of the other five offices
                      were not sure what to do with the data, and they either forwarded the
                      report to the Compliance Branch or took no action at all. In the fifth office,
                      the state was not using an EBT system. For example, the head of a field
                      office told us that one monthly report indicated that over 100 of the stores
                      in her area were probably engaged in trafficking, but she lacked the
                      resources to further analyze the data on any of these stores and take
                      action against them. Furthermore, FNS has no feedback system to inform
                      headquarters of how many of the stores on the list of likely traffickers
                      were actually reviewed in detail. Such information would enable
                      headquarters officials to know the extent to which the lists were
                      examined. Currently, FNS has no assurance that the stores on the monthly
                      lists are consistently reviewed.

                      The problems we found in the field offices show that FNS does not use the
                      information on likely violative storeowners to the program’s full
                      advantage. It has not assigned responsibility for, or provided guidance on,
                      following up on lists of probable traffickers. Such an approach would
                      enable FNS to make better use of its resources to identify and penalize
                      violators. While FNS staff might need several days each month to review
                      the lists sent from headquarters, undercover investigations require weeks
                      or months of staff work. Nevertheless, FNS headquarters officials told us
                      that FNS lacks the resources to effectively carry out its store-monitoring
                      activities, including reviewing electronic data. Over the last 2 years, the
                      agency has requested several hundred additional staff for store monitoring
                      but has not been successful in obtaining them.


                      Large amounts of debt owed by storeowners for Food Stamp Program
FNS Has Had           violations go uncollected. During the 6-year period covered by our review,
Problems Collecting   FNS collected about 11 percent of the storeowner debt for which it was

Penalty Debts         responsible. According to agency officials, this small percentage reflects
                      the difficulties involved in collecting this type of debt, such as problems in
                      locating debtors as well as their refusal to pay.6 However, weaknesses in


                      6
                       These problems are particularly acute for collecting debt from storeowners who were penalized for
                      unauthorized participation in the Food Stamp Program. In these cases, FNS may not have information
                      that would facilitate debt collection, such as Social Security numbers, because the storeowners never
                      applied to FNS to become authorized retailers. Furthermore, FNS cannot use one of its tools for
                      encouraging debt payment—threatening to remove the storeowner from the program—in these types
                      of cases.



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                               the agency’s debt collection procedures and practices also contributed to
                               low collections. For example, the agency has not consistently
                               implemented federal policies, practices, and procedures for, among other
                               things, aggressively collecting debt, assessing interest on unpaid debt, and
                               writing off uncollectible debt in a timely manner. Furthermore, the agency
                               has not yet referred any delinquent debt to the Department of the
                               Treasury, which could offset (deduct) the debt against any future federal
                               payments, including an income tax refund due a storeowner.

                               FNS expects to soon refer delinquent debt to the Department of the
                               Treasury after it fully implements provisions of the Debt Collection
                               Improvement Act of 1996. This law makes the Department of the Treasury
                               primarily responsible for collecting debts delinquent for over 180 days and
                               could help FNS better manage its collection activities.


FNS Has Not Implemented        FNS has not consistently implemented several federal debt collection
Policies, Practices, and       policies, practices, and procedures that are designed to ensure the
Procedures for Effective       effective collection of the debt owed to federal agencies. These practices
                               include
Collection of Penalties
                           •   collecting debts aggressively;
                           •   assessing interest on delinquent debts;
                           •   collecting installment debt payments within 3 years;
                           •   removing old uncollectible debts from accounts receivable;
                           •   establishing procedures to identify the causes of delinquencies and
                               developing the corrective actions needed; and
                           •   referring delinquent debts to the Treasury Department, which can deduct
                               the debt amounts from any federal payment due a storeowner and
                               reporting to the Internal Revenue Service (IRS) debts written off, which are
                               treated as taxable income to the storeowner.

                               A discussion of the policies, practices, and procedures that FNS did not
                               consistently implement follows.

Amounts Owed Not               Federal Claims Collection Standards provide that agencies shall
Aggressively Collected         aggressively collect all debts of the United States. Collection activities are
                               to be timely and followed up effectively.7 The standards state that three
                               progressively stronger “demand letters” are to be sent out to debtors. The
                               standards also cite a number of sources for federal collection agents to
                               check or contact to locate debtors who do not respond to the demand

                               7
                                4 C.F.R. 102.1.



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                                letters, such as driver’s license records, automobile title and registration
                                records, and other state and local government agencies.8

                                In all three FNS regions we visited, FNS personnel were not aggressively
                                collecting the penalties storeowners owed. For example, two of the three
                                FNS regional offices mailed out two progressively stronger demand letters
                                to debtors 30 days apart and sometimes attempted to telephone them. The
                                regional staff did little to locate storeowners who did not respond to the
                                demand letters. They stated that they did not have the resources for more
                                aggressive follow-up.

Interest Not Consistently       Federal legislation requires agencies to charge interest on outstanding
Charged                         debt.9 FNS has not consistently charged interest on debt that is not fully
                                paid when due. FNS officials told us that it is FNS’ current policy to assess
                                interest on all delinquent debts when FNS has clear authority to do so. The
                                officials stated that FNS does not assess interest on court-ordered
                                restitution debts unless provided for in the court order. They said that
                                some court orders provide for charging interest, while others do not.

                                Excluding court-ordered restitution debts, as of September 30, 1998, FNS
                                had a total of 1,182 storeowner debts. Of this total, we identified 1,053
                                debts that should have been charged interest because they were
                                outstanding for at least 60 days. However, FNS did not charge interest to
                                177, or 17 percent, of these debts. Furthermore, for the three FNS regional
                                offices we visited, interest was applied inconsistently for the same types of
                                debts. For example, the Southeast Region had 19 civil money
                                penalty—hardship debts that should have been charged interest. Of these
                                debts, 16 had no interest charged. FNS officials stated that they noticed an
                                inconsistency in FNS’ handling of interest charges on civil money
                                penalty—hardship and —trafficking cases. The officials added that FNS
                                would examine its policies on establishing interest on the various
                                categories of debt.

Installment Debt Payments Not   Federal Claims Collection Standards require federal agencies to collect
Consistently Collected          debts in one lump sum payment or generally within 3 years if installment
                                payments are used.10 About 400 storeowner debts were being paid during
                                fiscal year 1998. FNS was responsible for establishing and collecting the
                                financial penalties for 330 of these debts. Monthly payments collected by


                                8
                                 4 C.F.R. 104.2.
                                9
                                 31 U.S.C. 3717.
                                10
                                    4 C.F.R. 102.11.



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                              FNS on 125 debts, about 38 percent of the 330 storeowner debts, were so
                              small in relation to the total debt owed that the debts could not be
                              collected within 3 years. For example, one storeowner who had
                              transferred ownership of the store during a period of disqualification was
                              assessed a civil money penalty of $59,800 and was making installment
                              payments of $10 a month. At that payment rate, this debt would be paid in
                              about 498 years, even if no interest were assessed. FNS officials stated that
                              the agency’s current policy is to follow the general requirements
                              associated with the 3-year rule.

Old Uncollectible Debts Not   According to OMB Circular No. A-129, effective write-off and closeout
Removed From Agency’s         procedures on uncollectible debt are important because they permit
Accounts Receivable Records   managers to focus their efforts on the debts with the greatest potential for
                              collection. Agencies are instructed to develop a two-step process that
                              identifies and removes uncollectible accounts and establishes closeout
                              procedures.

                              We found that FNS’ write-off and closeout procedures are too general to
                              guide the regional personnel responsible for this activity. The procedures
                              do not specify the action that personnel should take if no collection is
                              made on a debt during a specified period. According to our analysis of FNS’
                              storeowner debts as of September 30, 1998, FNS had many old debts with
                              little or no collection activity. As of that date, FNS had a total of 1,393
                              storeowner debts, of which 1,003 of the debts, or 72 percent, had no
                              collections during fiscal year 1998. And 691 of the 1,003 debts were over 1
                              year old. Even many court-ordered restitution debts had no collections.
                              For example, 211 storeowner debts were a result of court actions—a total
                              of $6.8 million. However, 89 of these debts, or 42 percent, had no
                              collections during fiscal year 1998, and 79 of these debts were over 1 year
                              old. FNS officials stated that collections on court-ordered restitution debts
                              are supervised by the courts, not FNS, but FNS will examine the possibility
                              of being able to refer these debts to Treasury for collection and for IRS
                              Form 1099-C reporting if the debts were based on violations occurring
                              after December 27, 1996.11

                              Table 3 shows the age and dollar amounts of storeowner debt as of
                              September 30, 1998.




                              11
                               This form is used by agencies to report to IRS the amount of debt written off, and IRS treats the
                              amount written off as taxable income to the debtor.



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Table 3: Amounts of Storeowner Debt,
as of September 30, 1998, by Age of    Dollars in millions
Debt                                                                                   Balance as of                 Percentage
                                       Age of debt                                September 30, 1998                     of total
                                       1 day to 180 days                                         $3.0                         11
                                       181 days to 1 year                                         4.4                         15
                                       Over 1 year to 5 years                                    18.2                         65
                                       Over 5 years to 10 years                                   2.5                          9
                                       Over 10 years                                              0.1                          0
                                       Total debt                                               $28.2                        100
                                       Note: Some debt shown in the table is not delinquent.

                                       Source: FNS’ data.



                                       FNSagreed that old debts should be removed from its accounts receivable
                                       records and stated that efforts under way with Treasury will help the
                                       agency define the optimum point for removing old debts from its records.

Corrective Actions Needed to           Federal Claims Collection Standards instruct federal agencies to establish
Improve Debt Collection Not            procedures to identify the causes of delinquencies and defaults and
Developed                              develop the corrective actions needed.12 Although FNS headquarters was
                                       aware that it collected only a limited amount of the storeowner debt, FNS
                                       has not developed a written action plan to deal with the agency’s problems
                                       in collecting debts from storeowners. When FNS develops a plan to deal
                                       with these problems, it could assess the merits of implementing certain
                                       federal debt collection policies, practices, and procedures that it does not
                                       currently follow. These include the practices of charging penalties and
                                       administrative costs to delinquent debts and referring delinquent debts to
                                       credit bureaus. FNS officials told us that some of these practices might
                                       require legislative changes before they could be implemented.

Delinquent Debts Not Referred          FNS has not implemented the statutory requirement for the referral of
to Treasury                            delinquent debts to the Treasury Department.13 Under this requirement,
                                       agencies are to refer all accounts delinquent more than 180 days to
                                       Treasury, and Treasury is to deduct the debt amount from any federal
                                       payments due the storeowner. In addition, agencies are required to report
                                       to the Treasury Department any discharge of indebtedness over $600.14
                                       Agencies report such amounts on IRS Form 1099-C as taxable income.

                                       12
                                         4 C.F.R. 102.17.
                                       13
                                         31 U.S.C. 3711(g)(1).
                                       14
                                         26 U.S.C. 6050P.



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                           FNS, which recognized as far back as 1990 that it did not refer delinquent
                           debts to IRS for deduction from income tax refunds, has been slow to
                           address this requirement. However, it has made progress and will soon be
                           in a position to implement this requirement. In August 1994, FNS obtained
                           statutory authority for debt referrals using Social Security numbers to
                           other federal agencies. In December 1996, FNS issued regulations
                           implementing this authority. In March 1999, USDA published final
                           regulations allowing FNS to refer delinquent storeowner debts to Treasury
                           for offset, including deductions from income tax refunds.

                           FNS officials informed us that the Form 1099-C referral process is handled
                           centrally by headquarters. They added that storeowner debts originating
                           after December 27, 1996, for which FNS can share taxpayer identification
                           numbers with IRS, would be eligible for referral. For debts that FNS referred
                           to Treasury for collection, the agency has made arrangements for Treasury
                           to refer written-off debts to IRS. As of April 1999, FNS had not referred any
                           debt to Treasury for offset, which includes offset from any income tax
                           refund due the storeowner. As noted elsewhere in this report, FNS has
                           referred $3.5 million in debt to Treasury for limited services under cross
                           servicing. FNS has also not referred any Form 1099-Cs to Treasury.


Changes Made by the Debt   The Debt Collection Improvement Act of 1996 authorized the Secretary of
Collection Improvement     the Treasury to consolidate federal debt collection services within the
Act of 1996                Department. Among many requirements designed to improve debt
                           collection in the federal government, the act established two requirements
                           on agencies managing delinquent debt. It required agencies to refer to
                           Treasury for offset all debts that are delinquent more than 180 days. This
                           collection of federal offset programs includes the federal tax refund offset
                           program. The act also required federal agencies to submit debts that are
                           more than 180 days delinquent to Treasury for Treasury-operated
                           collection services referred to as cross servicing. Under cross servicing,
                           Treasury will issue specialized demand letters; attempt to contact the
                           debtor; refer the debt to authorized collection agencies, credit bureaus,
                           and the Department of Justice; and enter the debt into the Treasury offset
                           program. As noted in this report, some of these services have not been
                           conducted by FNS.

                           To implement the act, Treasury issued guidance to other federal agencies
                           in September 1996 on submitting all debts delinquent for more than 180
                           days to Treasury for its offset program. The guidance directed agencies to
                           include taxpayer identification numbers to facilitate collection activities



                           Page 13                                     GAO/RCED-99-91 Food Stamp Program
              B-282030




              under Treasury’s offset program and to submit debt data
              electronically—by computer modem, computer disk, or magnetic tape.

              As shown in table 3, about 90 percent, or $25.1 million of FNS’ storeowner
              debt as of September 30, 1998, was old enough—over 180 days—to send to
              Treasury for debt collection. However, FNS informed us that as of
              January 1999, it was unable to submit information on debts electronically
              to Treasury because of (1) data format problems and a lack of computer
              systems analysts and (2) the need to issue regulations implementing FNS’
              authority to disclose taxpayer identification numbers to Treasury. FNS
              expects to send information on delinquent debts to Treasury by October 1,
              1999.15

              FNS officials noted that FNS concentrated on getting debts owed by food
              stamp recipients, rather than storeowner debts, under Treasury’s new debt
              collection program. Since 1992, the state food stamp agencies, working
              with FNS, have referred debts owed by recipients, along with Social
              Security numbers, to IRS for tax return offset and have collected more than
              $320 million in delinquent overpayments. This collection from recipients
              illustrates that such offsets may be a useful tool for improving collections
              from storeowners.


              While FNS believes that it needs more resources to better identify
Conclusions   storeowners who violate Food Stamp Program regulations by reviewing
              electronic data, it can also do so by better using its existing resources to
              analyze the available data. By improving its debt collection, FNS has an
              opportunity to increase the integrity of the Food Stamp Program by
              reducing waste and abuse, and to collect more of the debt, thereby
              reducing its write-off of uncollectible debt.

              While FNS has assessed millions of dollars in penalties, it has collected only
              about 11 percent of the debt it was responsible for collecting during the
              period we reviewed. Various constraints impeded FNS’ ability to use
              taxpayer identification numbers in its debt collection activities and to
              implement certain federal debt collection policies, practices, and
              procedures. Equally important, FNS has not acted promptly to overcome
              these constraints, which it knew about as early as 1990. With the Debt
              Collection Improvement Act of 1996, FNS has a new tool available to



              15
                In early 1998, FNS submitted about $3.5 million in delinquent debts manually and without taxpayer
              identification numbers to Treasury, which had collected about $19,000, as of November 30, 1998.



              Page 14                                                    GAO/RCED-99-91 Food Stamp Program
                         B-282030




                         pursue storeowners who are not paying their penalties by sending debts
                         that it is unable to collect to Treasury for collection.


                         To improve the integrity of the Food Stamp Program, we recommend that
Recommendations          the Secretary of Agriculture direct the Administrator, FNS, to

                     •   develop guidance that specifies its field staff’s responsibilities, duties, and
                         guidelines in reviewing data on electronic benefits transfers to identify and
                         assess penalties against storeowners who violate the Food Stamp
                         Program’s regulations;
                     •   develop the corrective actions necessary, as required by the Federal
                         Claims Collection Standards, to help prevent delinquencies and defaults,
                         and determine the priority and resources it needs to assign to make debt
                         collection more effective; and
                     •   complete the actions needed to refer delinquent debts with storeowner
                         taxpayer identification numbers to Treasury electronically in a timely
                         manner.


                         We provided a draft copy of this report to USDA and FNS for their review
Agency Comments          and comment. We met with and obtained comments from FNS officials,
and Our Evaluation       including the Directors of the Grants Management Division and
                         Accounting Division, the Chief, Management Control and Audit Branch,
                         Financial Management; and the Director, Benefit Redemption Division,
                         Food Stamp Program.

                         FNS officials were concerned that certain aspects of the draft report did not
                         portray the agency’s debt collection activities accurately. First, they
                         believed that the draft did not fully recognize the difficulties in collecting
                         debt from storeowners. They noted that low collection rates reflect,
                         among other things, (1) problems in locating storeowners that have been
                         removed from the Food Stamp Program; (2) a lack of information relating
                         to court-ordered restitution and unauthorized retailer/wholesaler debts;
                         and (3) the refusal of some storeowners to pay their debts. We have
                         revised the report to recognize such difficulties but continue to believe
                         that weak debt collection practices also contribute to low collection rates.

                         Second, agency officials questioned the extent to which fully
                         implementing federal debt collection practices and procedures would
                         significantly increase debt collections. In related concerns, FNS officials
                         noted that the draft report did not compare FNS’ performance in managing



                         Page 15                                       GAO/RCED-99-91 Food Stamp Program
B-282030




debt to other federal agencies’ performance nor did it identify instances in
which actual debt could have been collected and FNS failed to do so.
Concerning the former, an analysis of FNS’ relative performance was not
within the scope of our work, nor would it have changed our basic
conclusions and recommendations. Concerning the latter, we
acknowledge that we cannot quantify the amount of additional collections
that would be associated with fully implementing the practices and
procedures. However, we believe that the implementation of these
practices and procedures would improve FNS’ collection efforts.

Third, FNS officials stated that the draft report failed to fully recognize the
obstacles to implementing certain debt collection tools, such as referring
delinquent debts to Treasury for offset against future federal payments, as
well as the agency’s efforts to overcome these barriers. We revised the
draft to better highlight obstacles and the agency’s actions.

Fourth, although FNS officials agreed with the report’s three
recommendations, they questioned the need for them, noting that FNS
already has these or comparable actions under way to address the
problems cited in the report. As stated above, we have revised the report
to better highlight the agency’s corrective actions. We believe our
recommendations are still warranted because FNS’ actions are not
complete.

FNS officials also provided comments to clarify technical information or
statements made in the draft report. We incorporated these changes in the
report, where appropriate.


We conducted our review from April 1998 through April 1999 in
accordance with generally accepted government auditing standards.
Appendix I discusses the scope and methodology for this review.

As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 10 days from the
date of this letter. At that time, we will make copies available to
congressional committees with responsibility for appropriations and
legislative matters for USDA and to the Honorable Daniel Glickman,
Secretary of Agriculture. We will also make copies available to others on
request.




Page 16                                       GAO/RCED-99-91 Food Stamp Program
B-282030




Please contact me at (202) 512-5138 if you or your staff have any questions
concerning this report. Major contributors to this report are listed in
appendix II.

Sincerely yours,




Lawrence J. Dyckman
Director, Food and
  Agriculture Issues




Page 17                                     GAO/RCED-99-91 Food Stamp Program
Contents



Letter                                                                                         1


Appendix I                                                                                    20
Scope and
Methodology
Appendix II                                                                                   21
Major Contributors to
This Report
Tables                  Table 1: Financial Penalties Levied and Collected, and Debt            4
                         Reduced by Other Means, Fiscal Years 1993-98
                        Table 2: Types of Financial Penalties and Amounts Owed FNS, as         6
                         of September 30, 1998
                        Table 3: Amounts of Storeowner Debt, as of September 30, 1998,        12
                         by Age of Debt




                        Abbreviations

                        EBT       electronic benefits transfer
                        FNS       Food and Nutrition Service
                        IRS       Internal Revenue Service
                        OMB       Office of Management and Budget
                        USDA      U.S. Department of Agriculture


                        Page 18                                 GAO/RCED-99-91 Food Stamp Program
Page 19   GAO/RCED-99-91 Food Stamp Program
Appendix I

Scope and Methodology


             To identify the dollar amount of financial penalties, collections, and debt
             reductions (waivers, adjustments, or write-offs) for storeowners in the
             Food Stamp Program during fiscal year 1993 through fiscal year 1998, we
             interviewed and obtained financial reports and debt management
             information from officials in the Food and Nutrition Service’s (FNS)
             Accounting Division. Because of the quality control program operated by
             FNS and our review of past financial reports conducted by U.S. Department
             of Agriculture’s Office of Inspector General, we accepted FNS’
             computerized debt collection data as reliable.

             To identify FNS’ procedures and practices for assessing financial penalties
             against storeowners for program violations, we interviewed and obtained
             information from FNS officials in headquarters and in seven field
             offices—Chicago and Springfield, Illinois; Columbia, South Carolina;
             Columbus, Ohio; Los Angeles and Sacramento, California; and Tallahassee,
             Florida. We reviewed (1) FNS legislation and guidelines relating to
             assessments, (2) the use of Office of Inspector General and FNS
             Compliance Branch investigation reports in the assessment process, and
             (3) 259 case files to determine the extent to which assessments were made
             by FNS staff.

             To identify the procedures and practices followed by FNS in collecting
             financial penalties levied against storeowners, we interviewed and
             obtained information from FNS officials in headquarters and three FNS
             regional offices—Midwest, Southeast, and Western. We selected these
             regions because they had the best and worst debt collection ratios in
             relation to total storeowner debt and had the largest accounts receivable
             balances. We analyzed various FNS reports on debt collections for fiscal
             year 1993 through fiscal year 1998. We also reviewed (1) FNS’ guidelines
             and practices for debt collection and (2) the Debt Collection Act of 1982,
             as amended; the Debt Collection Improvement Act of 1996; Office of
             Management and Budget Circular No. A-129; and the Federal Claims
             Collection Standards. We also discussed debt collection management
             activities with officials of the departments of Agriculture, Justice, and the
             Treasury.

             Since the focus of this work was on assessing and collecting financial
             penalties, we did not evaluate the merits of FNS’ reductions of financial
             penalties through adjustments, waivers, or write-offs. However, we did
             note and report that FNS had old uncollectible debts that it had not written
             off in a timely manner.




             Page 20                                      GAO/RCED-99-91 Food Stamp Program
Appendix II

Major Contributors to This Report


                        Ron E. Wood, Assistant Director
Resources,              Richard B. Shargots, Evaluator-in-Charge
Community, and          Daniel Alspaugh, Senior Evaluator
Economic                John K. Boyle, Senior Evaluator
                        Oliver H. Easterwood, Senior Attorney
Development             Alan R. Kasdan, Assistant General Counsel
Division, Washington,   William F. Mayo, Senior Evaluator
                        Dennis Richards, Senior Evaluator
D.C.                    Carol Herrnstadt Shulman, Communications Analyst




(150287)                Page 21                                GAO/RCED-99-91 Food Stamp Program
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