3 Red Flags That Could Prompt a Bankruptcy Audit

If you have declared bankruptcy or are considering declaring bankruptcy, you may be worried that your bankruptcy proceedings will trigger a bankruptcy audit by the bankruptcy court or the IRS.  Bankruptcy audits occur at random or based on certain red flags that auditors see in bankruptcy filing papers and that causes them to think that there may be an issue.  About half of the bankruptcy audits each year are determined randomly, with the other half being selected from accounts or cases that have these so-called red flags that catch the attention of the courts or auditors.  So, what three main types of red flags cause a bankruptcy audit, and how can you avoid them?

3 Major Red Flags that Could Prompt an Audit

1. One main type of red flag that causes a bankruptcy audit is a so-called “material misstatement.”  These are things like incorrect information on a bankruptcy form, missing or incorrectly filled out and incomplete paperwork, and general sloppiness that leads the bankruptcy auditor to believe that there may be intentional omission of important information from the bankruptcy case.  Making sure that you complete everything and double-checking that you have fulfilled all of the requirements asked of you by the court is the best way to avoid this type of red flag.
2. A second red flag in bankruptcy that can trigger a bankruptcy audit is hiding or omitting assets.  For example, selling real estate for much less than its fair market value can trigger an audit, or suddenly having much less valuable personal property than you did shortly before the bankruptcy.  Hiding assets, or the suspicion that you have hid or not accurately represented your assets, is a sure red flag that will trigger a bankruptcy audit, as well as potentially cause your bankruptcy to be thrown out entirely, and criminal charges filed against you by the courts.
3. A third red flag in bankruptcy that is almost guaranteed to trigger a bankruptcy audit or additional scrutiny is any evidence that  indicates that you have filed multiple times or cross-filed in various states.  This technique is often used to flood the courts with bankruptcy filings and cause delays in the processing and procedure of your bankruptcy filing.  If you have filed in multiple states, have multiple bankruptcy proceedings open at the same time, or have filed under false or different names in different areas, you can be almost sure that your bankruptcy will be audited with a fine-toothed comb.  Be careful that you do not set off any red flags with your bankruptcy.

Getting Help

Your best bet if you are thinking about declaring bankruptcy is to work with an experienced bankruptcy attorney. Your attorney can help you to complete your application in such a way that there are no red flags for an audit and can help you make sure you follow all laws and rules so your bankruptcy can go through without a hitch.