Bankruptcy Case Audits: Tips to Avoid Trouble

Everyone who files for bankruptcy wants to avoid bankruptcy audit procedures, just as tax filers want to avoid IRS audits. Audits can be time consuming, and there might be a risk that you'll be found to have done something wrong, so taking steps to avoid an audit is very important.

Random Case Audits

It is important to note that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 changed many bankruptcy laws to make it harder for people to file for bankruptcy and that one of the requirements of the act is random audits of a certain amount of cases. Still, these random audits are very rare, and it is a triggered audit that you should be focused on avoiding whenever possible.

Triggers for a Bankruptcy Audit

Random bankruptcy audits are performed when each judicial district simply selects cases to audit. After the rules requiring random audits were passed, and prior to May of 2008, 1 in 250 cases of bankruptcy were audited. However, due to budget cuts, since May of 2008 the chances of being selected for a random audit have dropped to 1 in 1000. If you are one of those unlucky few, there's nothing that you can do to stop the audit. For everyone else, there are some triggers to be aware of.

These triggered audits are ordered because of a red flag that pops up when reviewing your bankruptcy forms & paperwork. Some red flags include:

• Sloppy forms that may appear to be covering up something
• Incomplete forms with missing information
• Attempts to hide or undervalue an asset
• Filing numerous times
• Filing in other states with a different name or a false name

Avoiding a Bankruptcy Audit

Your chances of being audited randomly are pretty slim and are better now than they were in the past. However, your odds of being picked for an audit because of “material misstatements” or irregularities are much higher. Material misstatements or irregularities are things on the forms that look suspicious, and to avoid this, you need to be very careful when filling out the forms This means you should do the following:

• Make sure every field is complete.
• Double check your facts and figures. Mistakes may be interpreted as a way to cover up the truth.
• Be completely honest, especially when assessing the value of property and assets, If an asset was worth a certain amount before you filed for bankruptcy, then the paperwork needs to reflect its value honestly. It is suspicious if the value goes down, and if you show that you sold some property or an asset at a level that is much lower than a fair market price, this will also raise a red flag.
• Be sure to list all assets, even if you aren't sure if they should be listed or not. Not disclosing any of your assets could also be a major problem.

Finally filing several times, filing in other states, and filing under a different name or a false one are definite red flags.

Before and After an Audit

Soon after you file for bankruptcy, you may be notified that you are being audited. If this happens to you, you will need to present certain documents, including tax forms from the last two years, six months of pay stubs, paperwork from a divorce or property settlement, and other documents that can verify expenses and assets. You are given 21 days to show these documents.

Mistakes & Inaccuracies in the Paperwork

Around one fifth of all audited cases have mistakes in them. Some are small and will need just some documentation to correct. Others signal dishonesty and fraud and can result in a criminal investigation. When an inaccuracy is found, you are given a change to explain it. If the auditor is not satisfied, then it will be in his/her report to the court that you have material misstatements. Your bankruptcy will be disallowed, and you may face civil action or criminal charges.