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Filing for bankruptcy and the IRS

On Behalf of | Feb 12, 2019 | Bankruptcy

Every year, several people in Virginia decide to file for bankruptcy, be it Chapter 7 or Chapter 13, and during the process, they try to prepare for every eventuality so as not to be surprised later down the road. Accordingly, they work with their lawyers, trying to make the filing process as smooth as possible, and one of the questions many of them wonder about is whether filing for bankruptcy will cause the IRS to audit them.

As things stand, the IRS does not have an internal policy of targeting people who file for bankruptcy. After all, the IRS has neither the workforce nor the money to audit the tens of millions of Americans who file for bankruptcy every year. Furthermore, the bankruptcy proceedings themselves go through a person’s assets and liabilities with the aim of getting the individual back on their feet, so any discrepancy there will probably turn a few heads at the IRS.

All that being said, the IRS can still audit someone going through bankruptcy proceedings. In other words, filing for bankruptcy has no bearing on the probability of getting audited one way or another.

However, there are certain individuals who have a higher chance of getting audited than the rest of America. For instance, individuals who get paid in cash or make a living from tips usually get flagged for an audit more often than someone who has to declare their income regularly. Similarly, individuals who own a business tend to get visited more often by the taxman given how prevalent bookkeeping errors may be.

Even though filing for bankruptcy does not affect the chance of getting audited, it does affect what happens once the audit is over. After all, filing for bankruptcy shields individuals from their creditors who could include the IRS, reducing or eliminating any taxes owed. Nevertheless, every case is different which is why people who want to learn more about this topic as well as how it applies to their specific case might benefit from reaching out to an experienced attorney who can help clarify matters.