What Is A Bankruptcy Audit?
When we think of an audit, we usually think of the IRS. But there’s another kind of audit: The bankruptcy audit. And just like with the IRS, you probably would prefer not to be the subject of an audit.
When and How Are Audits Conducted?
Bankruptcy audits are conducted by the US Trustee’s office. The US Trustee is the federal office of the trustees—the federal agency that oversees bankruptcy courts and bankruptcy trustees. In order to avoid fraud, and to ensure that bankruptcy filers are acting honestly and responsibly, the office is charged with conducting regular audits of bankruptcy cases.
The reality is that very few cases are ever audited, and the percentage of audits is amazingly low, given the total number of bankruptcy filings.
The US Trustee can select cases for audit, or can select them completely randomly, and the office often does a mix of both. Legally, the trustee can audit 1 out of every 1,000 cases, and it usually doesn’t even audit that many.
The US trustee may also audit filings that seem suspicious, out of the ordinary, or that seem to deviate from the statistics of people who normally file in a given area. In other words, something about the petitions sets off a “red flag” to the trustee’s office.
What Happens in an Audit?
When the trustee’s office chooses which case to audit they will hire an independent auditing firm to conduct the actual audit. The filer and their attorney will be notified that their case has been chosen for audit. The trustee’s office’s auditor will request documents from the filer, usually more than what was filed in the bankruptcy case itself.
There is no expense to the debtor for the audit, but the debtor will have to get the audit firm documents that it requests. Usually, the firm will request documents that verify or back up claimed income that has been stated on the bankruptcy forms.
As you may imagine, the audit is trying to find situations where people have lied or misstated income, or assets, to the bankruptcy court.
If the auditor finds that there was some misrepresentation, it will make that recommendation—however, that is only a recommendation, and the debtor has a right to challenge that in court to avoid fines, sanctions, or criminal penalties (which can be filed if it looks like you purposely defrauded the bankruptcy court).
The debtor may have to provide even more documents to the auditors, showing why the auditors’ conclusions are incorrect.
If this all seems scary, take heart knowing that so long as you are honest with the information in your filing, you have little or nothing to worry about should an audit come your way.