There’s no evidence that the IRS gives extra scrutiny to the tax returns of people or businesses who once filed for bankruptcy. While the question is often asked by those involved in a business bankruptcy filing, and such people may potentially be audited during the same year, no legitimate connection exists between the two. The assumption is logical, but there are no rules in the IRS code that would sensibly trigger a connection between bankruptcy and being audited later on.
The IRS tends to examine any tax return more carefully after a major financial change takes place, and it certainly seems that bankruptcy would be considered one of those. But filing for bankruptcy is fairly common, and millions of people and businesses do it each year, so it would be a very rare occurrence for a bankruptcy alone to raise a red flag with the IRS.
Of course, if you file for business bankruptcy on a regular basis, or show some other sort of unusual activity such as drastic changes in income or serious errors on tax forms, the combination of the bankruptcies and the other behaviors can certainly contribute to a red flag and a subsequent audit.
While audits are feared by everyone, in reality a very small percentage of businesses and individuals are audited annually. There are, however, certain things that can create a red flag for the IRS. These things include:
If you are facing an audit, you need to consult with a tax lawyer to find out what your options are. A tax lawyer can help you to provide the required information to the IRS so you can get the audit over with as quickly and easily as possible.