You might be concerned that bankruptcy could lead to an Internal Revenue Service audit if you are working on Chapter 7 bankruptcy or Chapter 13 bankruptcy. This article will discuss whether bankruptcy is a red flag for the IRS, the reasons why the IRS would audit someone in bankruptcy, and the possible effects of bankruptcy on audit results.
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- Official IRS Policy for Bankruptcy Filing
- The IRS does not currently have a policy that targets bankruptcy filers.
There are millions of bankruptcy filings. It would be nearly impossible for the IRS audit each one. They don’t have the resources or staff to audit every person who files. Also, the IRS doesn’t have the resources or staff to audit every bankruptcy filing.
- However, your finances are checked during bankruptcy
During bankruptcy proceedings, the IRS will get a complete picture of your financial situation. Staff will review your assets, liabilities, debts, and other financial information to help you understand your financial picture.
This is done in order to quickly get you out of bankruptcy and get you back on your feet. This process is very similar to an audit.
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- The IRS can audit you during bankruptcy
- The IRS can audit a bankruptcy petitioner.
A bankruptcy filing can “stay” (or prevent) various government actions against a bankruptcy creditor, including a court judgement or lien. However, this does not include IRS audits.
These actions can be continued during bankruptcy under the U.S. Bankruptcy Act.
- IRS audits
- Notifications of tax deficiencies
- Tax returns are required
- These actions are allowed by the Bankruptcy Code’s automatic stay section.
- Chances of being Audited during Bankruptcy
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This does not mean you will not be selected for audit. Simply file your tax return and you can be selected. However, there is no rule that filing bankruptcy will make it less likely that you are audited.
Some groups are more at risk than others for audit. Audits are more likely to be performed on people who receive large amounts of their wages in cash, or in tips.
These groups often fail to declare all their income. Another group that could be subject to auditing is the business owners. This may be because they make mistakes in their bookkeeping.
The Bankruptcy can help protect you from audit results
Although bankruptcy won’t necessarily prevent you from being audited in the future, it can protect you at least from certain audit results. Bankruptcy protects against creditors such as the IRS and other government agencies.
These items may be reduced or even eliminated completely by bankruptcy protection.
- Some taxes
Although filing bankruptcy protection will not cause an IRS audit by itself, it could be used to reduce your tax liability after an audit is completed.
Are you concerned about an IRS audit?
Every person’s financial situation will be different. This includes your tax obligations, credit history and bankruptcy protection status.
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Legal counsel can help you if you are struggling with debt or worried about an IRS audit. Contact an experienced bankruptcy lawyer near you to get started.