Does a business bankruptcy cause a red flag on a later return filed with the IRS?
UPDATED: January 30, 2020
It’s all about you. We want to help you make the right legal decisions.
We strive to help you make confident law decisions. Finding trusted and reliable legal advice should be easy. This doesn't influence our content. Our opinions are our own.
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.
How Business Bankruptcy Affects Your Chances of Being Audited
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.
Red Flags That Will Increase My Odds of Being Audited
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:
- Making a mistake in your math when you report your taxes,
- Engaging in a business where the vast majority of your income is earned from cash transactions,
- Reporting income and/or deductions that seem out of the ordinary as compared to other businesses in a similar income bracket as your own.
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.