Will Filing For Bankruptcy Cause an IRS Audit?
I have been working diligently with my attorney to file for Chapter 7 or Chapter 13 bankruptcy and have been told by my friends that this may cause the IRS to put up the red flag for an audit. I am not really curious about the "why" of this scheme, but I just want to prepare myself for any eventualities. Can you shed any light on this situation?
As of right now, there is no stated policy that we know of that would indicate that the Internal Revenue Service specifically targets those who file for bankruptcy. Millions of people have filed for bankruptcy in the past ten years and it would be almost impossible (financially) for the IRS to audit every single one of those people, let alone screen each person that filed for bankruptcy to see if an audit would be necessary.
Of course, that doesn't mean that you won't be one of the lucky few to be selected for this noble and patriotic process simply by filing your tax return. But, as we said before, we are unaware that filing for bankruptcy will make an audit any more or less likely.
There are, however, certain groups that may be at a higher risk for 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 simply 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.