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Could my bankruptcy trigger a tax audit?

Few things in life cause as much anxiety as notification that you are being audited by the Internal Revenue Service (IRS). There are certainly red flags that can trigger an audit, however, and some of those include:

  • Getting paid in cash
  • Working in an industry where the bulk of your earnings comes from tips
  • Owning a business, as bookkeeping errors are common

There is no known policy in force at this time with the IRS that would indicate those who file for bankruptcy are specifically targeted for tax audits. Given the limitations of the IRS personnel and the financial resources devoted to audits in comparison with the millions of taxpayers who file for bankruptcy protection, it’s mathematically impossible to audit that many returns.

But there are similarities to tax audits and bankruptcies. Both put your finances under a harsh spotlight, with assets and debts being scrutinized carefully. Filing for bankruptcy will certainly not be a deterrent to an audit. While filing for Chapter 7 or Chapter 13 can halt certain actions by the government, the Bankruptcy Code exempts IRS audits.

A bankruptcy may offer some protection from the consequences of an audit. Since filing for bankruptcy protects debtors from their creditors, it may be possible to have interest, penalties or even the taxes themselves eliminated or greatly reduced.

If you are concerned about the liabilities of filing for Chapter 13 bankruptcy, it is prudent to address your concerns with a Long Island legal professional. That way you can weigh the benefits against the negatives and come up with a solution that best meets your fiscal needs.

Source: FindLaw, “Will Filing For Bankruptcy Cause an IRS Audit?,” accessed Dec. 29, 2017

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