Will Filing For Bankruptcy Cause an IRS Audit?

If you have been working on filing for Chapter 7 or Chapter 13 bankruptcy and you have outstanding tax issues, you may be worried that bankruptcy could trigger an Internal Revenue Service (IRS) audit. In this article, we address whether filing for bankruptcy sends a red flag to the IRS, why the IRS would audit someone during bankruptcy, and how your bankruptcy might alter the results of an audit.

Official IRS Policy on Bankruptcy Filing

As of right now, no stated policy shows that the IRS targets those who file for bankruptcy.

Millions of people have filed for bankruptcy, and it would be almost impossible for the IRS to audit every single one of those people. It is not a practical consideration for them to audit everyone who files. The IRS also doesn’t have the financial resources or the staff to automatically audit everyone who files for bankruptcy.

But Your Finances Are Checked During Bankruptcy

The IRS gets an accurate idea of your financial situation during bankruptcy proceedings. During the process, staff will sift through your assets, liabilities, and debts to understand your financial picture.

This is done to move you through bankruptcy quickly and put you on your feet again. The results can affect the IRS and the process is similar to an audit.

The IRS Can Audit You During Bankruptcy

Legally speaking, the IRS is not forbidden from auditing a person who has filed for bankruptcy protection.

A bankruptcy filing will "stay" (or stop) many different government actions against a bankruptcy debtor, such as a court judgment or a lien. This doesn’t include IRS audits, though.

The U.S. Bankruptcy Code allows these actions to continue during bankruptcy:

• IRS audits
• Notices of tax deficiencies
• Demands for tax returns

The provision that allows these actions can be found in the automatic stay section of the Bankruptcy Code.

Your Chances of Being Audited During Bankruptcy

None of this means you won’t be selected for an audit. You can be selected simply by filing your tax return. But there is no official rule that filing for bankruptcy will make an audit any more or less likely.

Certain groups may be at a higher risk for an audit than others. For example, people who are paid in cash or receive a large share of their pay in the form of tips may be at a higher risk of audit.

This happens because these groups sometimes fail to declare all of their income. Business owners are another group that may be more likely to be audited because of errors they may make in bookkeeping.

Bankruptcy Can Help Protect You From Audit Results

While bankruptcy will not necessarily stop you from being audited, it can at least partially protect you from audit results. Bankruptcy protects you from your creditors, including the IRS and other government agencies and institutions.

These items owed to the IRS may be reduced or eliminated entirely with bankruptcy protection:

• Some taxes
• Interests
• Penalties

So, while filing for bankruptcy protection won’t cause an IRS audit on its own, it may be able to reduce your overall tax liability once an audit has been completed.

Concerned About an IRS Audit?

Everyone’s financial situation is different, whether it involves your tax obligations, credit history, or bankruptcy protection status.

If you’re struggling with debt and are worried about an IRS audit, you’ll probably benefit from the peace of mind that comes with legal counsel. Get started by contacting an experienced bankruptcy law attorney near you today.