One concern that many people have when they file for bankruptcy is that the filing will trigger an audit from the Internal Revenue Service (IRS) when they file their taxes. While it is possible that you will be audited, there isn’t a tie to the bankruptcy.
With the number of people who file for bankruptcy each year, there isn’t a practical way that the IRS could audit each of them. There are financial limitations to what the IRS can do each year, so it will likely fare better if it doesn’t focus on people who have filed for bankruptcy.
Another reason why the agency might not focus on people who filed bankruptcy is that going through the bankruptcy court process is very similar to an audit in some cases. The court will go through your debts and assets as part of determining whether your case qualifies for protection.
It is important to note that the automatic stay the bankruptcy court issues isn’t going to prevent you from being audited. Your case also won’t stop the agency from sending you demands for tax returns or notices of tax deficiencies.
If you are audited, there is a chance that your bankruptcy case might help you. One of the benefits of bankruptcy is that you’re protected from your creditors. This provision does include the IRS, so what you owe to the IRS in penalties, interest and taxes might be significantly reduced. The amount due may even be eliminated.
Since this is a such a serious financial matter, you need to ensure you are handling any interaction with the IRS appropriately. Once you file for bankruptcy, you need to consider how that case will impact your interactions with the tax-collecting agency.