Since 2006, debtors filing for bankruptcy protection have been subject to random audits. As part of the reforms of the Bankruptcy Abuse and Prevention Consumer Protection Act of 2005 (BAPCPA), Congress required random audits to verify the accuracy and completeness of debtors’ bankruptcy filings. 28 USC 586(f). The targets are randomly selected and average approximately one out of every 250 cases in each judicial district. Debtors with unusually high income and expenses may be subject to greater frequency of audits.
If you are selected for an audit, you will be notified by the Trustee early in the proceedings and likely before the 341 meeting of the creditors. The audit will be conducted by an independent firm selected by the U.S. Trustee Program. Documents requested in an audit can vary but will likely include six (6) months of pay stubs and bank account statements, last two (2) federal tax returns and any property settlement documentation. See Audit Standards. A good tip is to make sure the debtor has documentation for all items listed in the petition and schedules to the extent documentation is possible. Debtors will typically have twenty-one (21) days to provide the audit firm with the requested documents. Delay or failure to cooperate with the auditors can result in the denial of a discharge. 11 USC 727(d)(4). If a material misstatement is uncovered, the auditor will contact the debtor or debtor’s attorney for an explanation. In that event it is critical to provide an immediate written explanation for the misstatement. Once the audit is complete, an audit report will be filed with the Court. If the auditors find material misstatements which cannot be explained, the bankruptcy Trustee is authorized to take appropriate civil action or refer the matter to the U.S. Attorney for a criminal investigation.
There are no tricks to avoiding the random bankruptcy audit. Consequently it is important to review the bankruptcy petition and schedules carefully before filing with the Court.