I am preparing to file for Chapter 7 bankruptcy and have been advised that the IRS will look at this as a red flag. Do you have ideas on this?
We are not aware of any policies -- written or unwritten -- targeting people filing for bankruptcy for IRS audits. With about 1.5 million people filing for bankruptcy every year, the IRS would quickly run out of person power if it tried to target or specially screen bankruptcy filers. Of course, this doesn't guarantee that your return won't be singled out for special attention, but the IRS hasn't indicated that filing for bankruptcy automatically moves you to the head of the audit line.
Updated by: Kathleen Michon, J.D.