Does Filing for Bankruptcy Trigger an IRS Audit?

Man doing IRS Audit

If you were worried that filing for bankruptcy would make you a more likely target for an IRS audit, the answer is that bankruptcy is unable to affect those chances. That said, certain aspects of the bankruptcy process can attract the IRS's attention and potentially lead to an audit. These include discrepancies in your financial information, significant reductions in reported income, or large deductions that seem unusual.

The Role of the IRS in Bankruptcy

The IRS, like any other creditor, has a stake in your bankruptcy case if you owe back taxes. In bankruptcy, certain tax debts may be discharged, while others may not. The rules for discharging tax debt are complex and depend on factors such as the type of tax owed, the age of the tax debt, and whether you filed your tax returns on time.

While bankruptcy itself is not a trigger for an IRS audit, the information you provide during the process can raise red flags.

Here are some common issues that may prompt the IRS to take a closer look:

  • Unreported income: Failing to report all sources of income can raise suspicions. The IRS matches income reported on your tax returns with information from third parties, such as employers and financial institutions. Discrepancies can lead to an audit.
  • Large deductions: Claiming unusually large deductions, especially without proper documentation, can draw scrutiny. The IRS may want to verify the legitimacy of these deductions.
  • Significant changes in income: A drastic drop in income from one year to the next, without a clear explanation, can prompt an audit. The IRS may question whether the reduction is legitimate or an attempt to evade taxes.
  • Failure to file tax returns: If you have not filed tax returns for several years and then suddenly file for bankruptcy, the IRS may take an interest in your case to ensure all tax liabilities are addressed.

You can avoid the risk of incurring an audit as a result of your bankruptcy proceedings by ensuring that your financial disclosures are thorough and accurate. Make sure all past and current tax returns are filed before filing for bankruptcy, and consult with a bankruptcy attorney and/or tax attorney. These legal professionals can help you navigate the complexities of bankruptcy and tax law while ensuring compliance with them.

Contact Us for Legal Assistance

If you are concerned about dealing with the IRS during your bankruptcy case, Buchalter & Pelphrey can provide the unique type of legal support you need. Not only do we practice bankruptcy law, but we can assist clients with tax-related legal matters as well. Even if your bankruptcy case doesn’t intertwine with your tax woes, we can help you address both separately and keep them from entangling.

Whether you need help with your taxes, bankruptcy, or both, contact us today for more information.

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