Food Stamp Program: Storeowners Seldom Pay Financial Penalties Owed for
Program Violations (Letter Report, 05/11/99, GAO/RCED-99-91).

Pursuant to a congressional request, GAO provided information on the
Food and Nutrition Service's (FNS) efforts to maintain the integrity of
the Food Stamp Program, focusing on the: (1) dollar amount of the
financial penalties, collections, and debt reductions (waivers,
adjustments, or write-offs) affecting storeowners violating program
regulations during fiscal year (FY) 1993 through FY 1998; (2)
effectiveness of the FNS' procedures and practices for assessing
financial penalties against storeowners for program violations; and (3)
effectiveness of FNS' procedures and practices for collecting financial
penalties levied against storeowners.

GAO noted that: (1) over the past 6 years, FNS and the courts have
assessed or levied about $78 million in financial penalties and interest
against storeowners for violating Food Stamp Program Regulations; (2)
the penalties and interest are recorded as debts in FNS' accounting
records; (3) during this period, FNS and the courts collected $11.5
million, or about 13 percent of the total penalties, and FNS reduced the
amount owed by storeowners by about $49 million, or about 55 percent,
through waivers, adjustments, or write-offs; (4) 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; (5) in 7 FNS field
offices, GAO reviewed 259 Department of Agriculture undercover
investigations that identified program violations, and GAO found that
FNS almost always assessed financial penalties against storeowners when
warranted; (6) however, other storeowners who may have violated program
regulations and could have been penalized were not identified; (7) FNS
is not effectively using data on the electronic redemption of food stamp
benefits to identify these storeowners; (8) FNS 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; (9) however, weaknesses in FNS' debt
collection procedures and practices also have contributed to low
collections; (10) FNS has not aggressively collected debt, consistently
assessed interest on unpaid debt, and written off uncollectible debt in
a timely manner; (11) FNS 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; (12) FNS 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; and
(13) this law makes the Treasury primarily responsible for collecting
debts delinquent for over 180 days.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-91
     TITLE:  Food Stamp Program: Storeowners Seldom Pay Financial
	     Penalties Owed for Program Violations
      DATE:  05/11/99
   SUBJECT:  Fines (penalties)
	     Program abuses
	     Law enforcement
	     Retail facilities
	     Welfare benefits
	     Fraud
	     Food relief programs
	     Noncompliance
	     Internal controls
	     Debt collection
IDENTIFIER:  USDA Electronic Benefit Transfer System
	     Food Stamp Program

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FOOD STAMP PROGRAM: Storeowners Seldom Pay Financial Penalties
Owed for Program Violations GAO/RCED-99-91 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

  GAO/RCED-99-91

GAO United States 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.

Results in Brief Over the past 6 years, the Food and Nutrition
Service and the courts have 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

GAO/RCED-99-91 Food Stamp Program Page 1

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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.

Background FNS administers the Food Stamp Program in partnership
with the states. It 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).

GAO/RCED-99-91 Food Stamp Program Page 2

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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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Financial Penalties Levied, Collected, or Written Off During
Fiscal Year 1993 Through Fiscal Year 1998

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

Table 1: Financial Penalties Levied and Collected, and Debt
Reduced by Other Means, Fiscal Years 1993- 98

Dollars in millions

Fiscal year Balance at

beginning of fiscal year New penalties Interest added

to penalties Collection of penalties Other reductions

of penalty debt Balance at end of 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 Financial Penalty Debts

As table 1 shows, during fiscal year 1993 through fiscal year
1998, FNS 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 Penalties Against Storeowners

FNS' accounts receivable records classify financial penalties
against storeowners into the following seven types:

 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
September 30, 1998

Dollars in millions

Type of financial penalty Amount owed as of 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 Penalized Identified Program Violators but Could
Identify More Violators With Better Use of Electronic Data

FNS almost always assessed financial penalties, when warranted,
against storeowners who were identified through undercover
investigations as violating the Food Stamp Program's regulations.
5 However, we found that FNS could have identified additional
storeowners who violated program regulations if it more
effectively used data on electronic benefits transfers. FNS has
made limited use of this information because it has not developed
an effective plan for reviewing and acting on this information,
including designating responsible staff. FNS officials believe
that they need more personnel to analyze the data on stores that
are likely to be trafficking.

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 Assessed Financial Penalties When Warranted

FNS followed its procedures for assessing financial penalties in
nearly all of the 259 cases we reviewed in which stores were found
to have violated 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 Use Electronic Data to Identify and
Penalize Program Violators

Through the use of data on electronic benefits transfers (EBT),
FNS identifies stores that are probably engaged in trafficking,
but it does not consistently follow up on this information with
further analyses to determine whether violations are occurring and
to assess penalties. 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.

FNS Has Had Problems Collecting Penalty Debts

Large amounts of debt owed by storeowners for Food Stamp Program
violations go uncollected. During the 6- year period covered by
our review, FNS collected about 11 percent of the storeowner debt
for which it was 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 Policies, Practices, and Procedures for
Effective Collection of Penalties

FNS has not consistently implemented several federal debt
collection policies, practices, and procedures that are designed
to ensure the effective collection of the debt owed to federal
agencies. These practices include

 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 Aggressively Collected Federal Claims Collection
Standards provide that agencies shall

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 Charged Federal legislation requires
agencies to charge interest on outstanding

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 Consistently Collected Federal
Claims Collection Standards require federal agencies to collect

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 Removed From Agency's Accounts
Receivable Records

According to OMB Circular No. A- 129, effective write- off and
closeout procedures on uncollectible debt are important because
they permit 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 Debt

Dollars in millions

Age of debt Balance as of September 30, 1998 Percentage

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.

FNS agreed 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 Improve Debt Collection Not Developed

Federal Claims Collection Standards instruct federal agencies to
establish procedures to identify the causes of delinquencies and
defaults and 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 to Treasury

FNS has not implemented the statutory requirement for the referral
of 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 Collection Improvement Act of 1996

The Debt Collection Improvement Act of 1996 authorized the
Secretary of the Treasury to consolidate federal debt collection
services within the 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

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

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.

Conclusions While FNS believes that it needs more resources to
better identify 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.

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

B-282030

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

Recommendations To improve the integrity of the Food Stamp
Program, we recommend that 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.

Agency Comments and Our Evaluation

We provided a draft copy of this report to USDA and FNS for their
review and comment. We met with and obtained comments from FNS
officials, 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

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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.

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

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

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

Contents Letter 1 Appendix I Scope and Methodology

20 Appendix II Major Contributors to This Report

21 Tables Table 1: Financial Penalties Levied and Collected, and
Debt

Reduced by Other Means, Fiscal Years 1993- 98 4

Table 2: Types of Financial Penalties and Amounts Owed FNS, as of
September 30, 1998

6 Table 3: Amounts of Storeowner Debt, as of September 30, 1998,

by Age of Debt 12

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

GAO/RCED-99-91 Food Stamp Program Page 18

GAO/RCED-99-91 Food Stamp Program Page 19

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.

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

Appendix II Major Contributors to This Report

Resources, Community, and Economic Development Division,
Washington, D. C.

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

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

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