What is a Bankruptcy Audit?
February 8th, 2017 by Bunch & Brock
The word “audit” tends to strike fear (or at least mild apprehension) in the heart of every taxpayer, but the Internal Revenue Service isn’t the only government entity that can use its official powers to investigate citizens and their paperwork. The United States Trustee Program (USTP), part of the Department of Justice, oversees the administration of corporate and consumer bankruptcy cases. One of its specific responsibilities is “taking legal action to enforce the requirements of the Bankruptcy Code, and to prevent fraud and abuse.”
When the Bankruptcy Code was overhauled a decade ago, it gave the USTP the authority to randomly designate one out of every 250 consumer bankruptcy cases in each of the 94 federal judicial districts for audit. It also authorized audits wherever debtors posted statistically unusual income or expenses. Although trustees choose the cases, the actual audits are performed by independent accountants. The purpose of the audit is to determine the accuracy, truthfulness, and completeness of the information required to be provided by the debtor under the Bankruptcy Code.
In general, a non-business Chapter 7 or 13 bankruptcy is selected for audit within 10 days after the bankruptcy petition is filed. A private audit firm is immediately assigned and can request any records that can potentially verify the information that is listed in the petition. Commonly requested documents include:
- All paystubs for the debtor and the debtor’s spouse covering the six months prior to filing
- Income tax returns, with all attachments, for the two tax years prior to the filing
- All bank account statements for the six months prior to the filing. Sometimes, documentation explaining the source of every deposit or credit, and the purpose of every check, withdrawal, or debit will be requested.
- Divorce decrees
- Property settlement orders for the three years prior to filing
- Pending child support orders.
The debtor has 21 days to get requested information to the auditor, which then has 21 days to complete the audit and submit its findings to the bankruptcy court. Auditors often find a “material misstatement,” which is an inaccuracy or omission that significantly impacts the integrity of the debtor’s bankruptcy documents. It could be a small overlooked detail or a large mistake, but if it was unintentional, there are often no consequences. However, an intentional material misstatement is serious. It can result in a debtor’s bankruptcy being dismissed or even the filing of a bankruptcy fraud charge.
The Lexington, KY bankruptcy audit attorneys at Bunch & Brock hope that you have found the information presented here to be useful. If you wish to learn more about how our firm can be of assistance to you, or you want to learn more about this topic, we encourage you to contact us by calling 859-254-5522 or filling out this online form. With more than 35 years of experience in the state of Kentucky, we have helped many people navigate the complexities of bankruptcy. Our skilled attorneys make sure that every aspect of the petition is done properly and timely, which reduces the risk of any red flags that may grab a trustee’s attention – and grab your bankruptcy case for an audit.