QUESTION:

I am preparing to file for Chapter 7 bankruptcy and have been advised that the IRS will look at this as a HUGE red flag. Apart from not understanding why, I am more curious as to what to expect. Do you have ideas on this?

ANSWER:

We are not aware of any policies -- written or unwritten -- targeting bankrupts for audits or other IRS problems. With more than 1.5 million people having filed for bankruptcy in each of the first five years of the new millennium, the IRS would have quickly run out of person power if it had targeted or specially screened all or most of them. Of course, this doesn't guarantee that your return won't be singled out for special attention, but the IRS hasn't indicated that filing for bankruptcy automatically moves you to the head of the audit line.