One of the least discussed changes brought about by the October, 2005 changes to the bankruptcy law was a provision that provides for “audits” of random cases. When a case is audited, it is selected at random by the United States trustee and the debtor and debtor’s attorney are required to submit extensive documentary proof of information set out in the petition.
In January, 2008, these audits were halted because the U.S. Trustee ran out of money for this program. Now, according to Jill Michaux of the Bankruptcy Law Network blog, debtor audits are back. You can read Jill’s post and the links therein to learn more about this audit program.
What actually happens during an audit?
If you are selected for an audit, the U.S. Trustee sends you a notification that you and your attorney will be contacted by an outside accounting firm. The firm will send you a notice asking for things like:
- Pay stubs for you and your spouse for the six months prior to the month you filed your bankruptcy petition
- Bank account statements for six months, with explanations for all deposits over $500
- Income tax returns including all schedules and forms for the previous two years
- Divorce documents, including property settlement and child support orders
- Self employment documents
- Proof of school expenses
- Proof of child care expenses
- Proof of food expenses
- Proof of transportation expenses
Once you get this information to the auditor, he will analyze this information and compare it to the information set out in your petition.
In the first eight months of the audit program, 1631 audits were completed. Of those, 29% of the cases audited were found to have at least one material misstatement. 12% of the audits resulted in a Report of No Audit. The U.S. Trustee statistics do not tell us how significant any of these misstatements are. (Thanks to Peter Orville of the Bankruptcy Law Network for his series of posts about Audits).
When the program was active, only a few of my cases were selected for audits. After providing a lot of paper, the audit was concluded with no problem. On the other hand, these audits required me to spend a lot of unexpected time gathering and reviewing documents. As such, I have changed my fee contract to provide for an additional fee for any case selected for an audit. It continues to puzzle me whether members of Congress truly understand that people who are filing bankruptcy most likely don’t have a lot of money available for attorney’s fees, yet every change to the law increases this burden.