One of the things lobbyists convinced Congress absolutely had to be added to the Bankruptcy system in 2005 were Debtor audits.  Well, this concept has come and gone a few times since then, generally due to budget fluctuations.  However, it is being reported that the US Trustee has found more money; and random audits are once again a fact of life.

Now, before you get too excited, I have not seen figures for the frequency of audits at this point.  One in every 250 cases being selected is pretty much the historical standard, but I have no idea how much funding the US Trustee has available at this point in time.

The purpose of the audits is to find “material” misstatements in the Debtors’ petition and schedules.  Now, you would think that material would mean material for purposes of the Bankruptcy process and to people who understand how the system works.  No, material at this point seems to mean material to the independent CPA’s from large CPA firms that the U.S. Trustee’s office contracts with to do these audits.  These guys aren’t accustomed to preferential transfers and median income calculations.  These are the same people who audit corporate financial statements.  (If you aren’t rolling your eyes by now, you haven’t been reading my blog long enough.)

Anyway, if your case is selected for an audit, you will have to begin by producing certain documents to the auditors.  The last list of documents I have seen for an audit is from 2008, but I don’t think it has changed much.  Here it is:

• Payment advices or other evidence of payment from an employer for the six full calendar months preceding the date of the bankruptcy petition, plus those received in the calendar month in which the bankruptcy was filed, from the debtor(s), or from an individual debtor and the individual debtor’s non-filing spouse unless the debtor has checked Box 2.b on Form B22A (Chapter 7 cases only).
• Federal income tax returns, including all schedules and all W-2, 1099, and K-1 forms, for the two most recent taxable periods prior to the date of the bankruptcy petition.  If either of the returns has not been filed, provide copies of the two most recently filed federal income tax returns.  (If joint case and debtors filed separate returns, provide both returns.)
• Account statements for the six months preceding the date of the bankruptcy petition for all depository and investment accounts in which the debtor(s) had an interest in any of the six months, including statements (even if received post petition) that reflect activity in the month in which the petition was filed; along with sufficient documentation to explain the source of every deposit or credit over $500.  (Include information for checking, savings, money market, mutual fund, and brokerage accounts.  Examples of documentation for deposit transactions include check registers and annotations on or attached to the account statements.)  Audit firms may request that you provide additional documentation to sufficiently explain the source or purpose of an account statement entry or entries.
• If the debtor(s) is divorced, (a) the divorce decree, (b) any orders regarding property settlements entered within the last three years, and (c) any alimony or child support orders currently in effect and amendments thereto.
• If the debtor(s) is self-employed, then for each business owned by debtor or from which debtor derives self-employment income, (a) business tax returns for the two most recent taxable periods prior to the date of the bankruptcy petition, (b) most recent accounts receivable ledger and aging schedule/report, (c) most recent balance sheet prior to the date of bankruptcy petition, (d) income statement for the most recent period ended prior to the date of the bankruptcy petition, (e) quarterly sales tax return for the most recent period ended prior to the date of the bankruptcy  petition, if any, (f) account statements for business depository account(s) for the six months preceding the date of the bankruptcy petition, and the month in which the petition was filed, along with sufficient documentation to explain the source of every deposit or credit, and the purpose of every check, withdrawal, or debit, and (g) most recent business asset listing and depreciation schedule, if any.

My favorite requirement is that last one.  Accounts receivable ledgers, balance sheets, income statements, depreciation schedules — from a self-employed debtor?  Who are they kidding?  Anyone who has that sophisticated an accounting system isn’t self-employed.  They may operate a wholly owned professional corporation, but they aren’t self-employed.  Your self-employed debtors are lawncare people, electricians, oil field contractors, remodeling contractors, plumbers, oh and the next-door neighbor’s cousin who cleans your house. All of whom are, of course, famous for their detailed, double-entry accounting systems.

Yet another example of the 2005 Bankruptcy reform act and its ongoing quest for an abuse in need of a remedy.

Elaine