As we discussed in this prior post, the United States Trustee’s office will randomly audit Chapter 7 and Chapter 13 cases (as many as one in every 250 cases), and will audit other cases because there is something in the Schedules that makes that case stand out from the “average” Chapter 7 or 13 cases. This could be a higher than average income, very high expenses or some other factor. In this post, we will focus on how to prepare for each of these kinds of audits. There is one universal principle that applies across the board: Make sure all Schedules are completed honestly, accurately and completely when they are filed! By the time you get to an audit, it may be too late to correct any errors, whether or not they are intentional and it could certainly look a little suspect. Any successful Bankruptcy case starts with getting the Schedules as accurate as possible, and good lawyers will make sure they spend time reviewing them with you and asking questions about them.
If you are one of the relatively few people chosen for a random audit, an outside audit firm contracted by the U.S. Trustee will contact your lawyer to request information and documents. They will primarily be looking at your income, expenses and assets as stated on the Schedules so they might ask for employment records (W-2’s, 1099’s, etc.), bank statements, tax returns, credit card statements, receipts for purchases or other supporting documentation. You have an obligation to fully cooperate with the auditor and provide the information requested. When the audit is complete, the auditor will issue a report on their findings, including whether any material misstatements were made in the Schedules. While “material misstatements” is not defined, you can probably consider that it means significant misstatements that might be intended to change the course of the case, such as fudging income numbers to pass the Means Test or failing to disclose transfers of money or property. If material misrepresentations are found, it will then be up to the U.S. Trustee’s office to decide whether to seek dismissal or conversion of the case, object to discharge or, in egregious cases, refer the matter to the United States Attorney. They may also decide that any errors are innocent mistakes or not material to the case.
If your case is flagged by the U.S. Trustee’s office because something in your schedules stands out, such as your income and expenses, the audit will most likely be conducted by the U.S. Trustee’s office rather than an outside firm. It is important that you discuss this with your lawyer, as your lawyer will either know why the audit is taking place or can ask the attorney for the U.S. Trustee. For example, in a recent case flagged for a review my client qualified for Chapter 7 based on business debt and he had a far higher than average monthly income. We knew when we were preparing for the Rule 2004 examination that we would be asked questions about those issues and we also gathered all supporting documents even though we were not asked for them prior to the exam. Again, the best way possible to get ahead if this issue is to hire a good, experienced Bankruptcy lawyer and make sure everything is correct from the beginning.