The U.S. Trustee audits bankruptcy cases every year. The purpose of the audit is to monitor fraud and prevent debtors from lying about their income and schedules. If your Chapter 7 or Chapter 13 case is audited, and the U.S. Trustee’s office finds evidence of fraud or inaccurate information, it could lead to the dismissal of your case or even criminal penalties. However, very few bankruptcy cases are audited.
Note: On March 30, 2013 the U.S. Trustee Program announced it was indefinitely suspending its audit program due to budget constraints.
(Learn more about the role of the U.S. Trustee in your bankruptcy case.)
Which Bankruptcy Cases Are Audited?
Random selection and nonrandom selection are two ways that the U.S. Trustee selects bankruptcy cases for audit.
Random selection. Bankruptcy law permits the U.S. Trustee’s office to randomly audit up to one out of every 1,000 Chapter 7 or Chapter 13 cases filed. It often chooses to audit fewer cases than this. However, it must audit at least one out of 250 cases in each federal judicial district.
Audit based on red flags in the petition. The U.S. Trustee will also audit bankruptcy cases in which the debtor’s income and expenses greatly vary from those of most filers in their filing district.
Bankruptcy Audit Procedures
Once the U.S. Trustee identifies a bankruptcy case for audit, it selects an audit firm to conduct the audit. The firm will review the debtor’s petition, schedules, and documents. Individual Chapter 7 or 13 debtors are typically selected for audit within ten days after the filing of the bankruptcy petition, and an audit firm is immediately assigned to the case.
Once the case is selected for audit, the debtor or debtor’s attorney is notified that the case was chosen for audit. At this time they are also notified of what information or documentation the audit firm needs. Debtors must fully cooperate with the audit firm and promptly provide the additional information and records requested by the firm. The attorney or debtor has 21 days to send the requested items to the audit firm.
What Happens in the Audit
In a typical audit, the audit firm will verify the income, expenses, and assets in the bankruptcy schedules and statements. The debtor won’t incur any costs for the audit, other than copying documents that the audit firm requests.
The audit firm is looking for any material misstatements of income, expenses, or assets. Some examples of material misstatements include hiding assets and making false statements to the bankruptcy court.
The Audit Report
The audit firm will has 21 days to complete the audit and submit its report or a “Report of No Audit” with the court. The auditing firm’s report details the findings of the audit. The report is not a legal determination. It’s up to the bankruptcy court to review the findings and determine if the debtor made material misstatements on the petition.
What Happens if the Audit Firm Finds a Material Misstatement?
If the audit firm discovers any material misstatements, the debtor must then provide evidence that reasonably explains those misstatements. This evidence must be provided to audit firm within a reasonable amount of time.
If the debtor is unable to provide sufficient evidence to reasonably explain the problem, the court might:
- dismiss the debtor’s case
- deny or revoke the debtor’s ability to obtain a discharge, or
- refer the matter to the U.S. Attorney for criminal investigation.
Whether a debtor’s case is selected for audit or not, the U.S. Trustee will most likely find any misrepresentations in the course of a debtor’s bankruptcy case. The hiding of assets or misrepresentation of income will lead to the dismissal of a debtor’s case and criminal prosecution whether the U.S. Trustee discovers the misstatement or an audit firm does. Either way, it is not worth it to mislead the bankruptcy court when filing a case.