By law a certain number of cases must be audited for debtors’ “material misstatements.” But how does 0% chance of being audited sound to you?
Our last blog referred to an ongoing system of independent audits of Chapter 7 and 13 cases looking for “material misstatements” by the individuals filing those cases. What are these audits looking for, what are your odds of getting audited, and why are these audits not worth worrying about—at least not today?
Purpose of the Audits
The intent of these audits was to combat fraud by consumers filing bankruptcy. The passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was largely fueled by the perception that, as the title of the act infers, bankruptcy abuses were rampant and needed to be prevented.
The Law Creating the Audits
BAPCPA required the U.S. Attorney General to arrange for audits “to determine the accuracy, veracity, and completeness” of debtors’ “petitions, schedules, and other information that the debtor is required to provide.” The Attorney General delegated this responsibility to the U.S. Trustee Program, a component of the U.S. Department of Justice. These audits were only for Chapter 7 or 13 cases, and only those “in which the debtor is an individual.” Apparently Congress didn’t think businesses filing bankruptcy were being dishonest.
The law requires both 1) random audits of “not less than 1 out of every 250 cases in each Federal judicial district” and 2) selective audits for cases with higher debtor income or expenses. See Section of 603 of BAPCPA.
What is a “Material Misstatement” that Must be Avoided?
“Material misstatement” is not defined in the Bankruptcy Code. The U. S. Trustee does not publically disclose what it means. Why not? As explained in its recent report about the audits of fiscal year 2012, “specific criteria for reporting a material misstatement are not released to the public to preserve the integrity of the audit process.”
However, this same report says that “in general material misstatements relate to the understatement or omission of the debtor’s assets, income, or pre-petition transfer of property.”
What Happens if Your Case is Audited and a “Material Misstatement” is Found?
The same report responds:
If a material misstatement is identified in a Report of Audit, the bankruptcy court gives notice to all creditors in the case. In addition, the United States Trustee determines what action is appropriate based on the material misstatement(s) and may pursue a variety of actions depending on the circumstances of the case, including seeking denial or revocation of discharge, or reporting the material misstatement to the U.S. Attorney. In many instances, the United States Trustee may take no action… based on a number of factors, including whether the debtor corrected the error (e.g., filed amended schedules) or whether the material misstatement was intentional.
Previous Odds of Being Audited
To use the language of the United States Trustee’s report, it is “authorized to randomly designate for audit 1 out of every 250 consumer bankruptcy cases,” as well as “to designate cases for exception audit” in which the debtors’ income or expenditures are unusually high. And back in 2007 that is what occurred.
But not since then. “Due to budgetary constraints,” from 2008 through 2012 the random audit rate was radically reduced, at first down to only 1 out of 1,000 consumer cases, and then at times as low as 1 out of 1,700 cases. In fact, all audits were completely suspended during part of fiscal years 2011 and 2012.
Audits Are Now “Indefinitely Suspended”
According to an oddly-worded notice dated March 20, 2013 on the U.S.Trustee Program’s website:
Due to budgetary constraints, the USTP has indefinitely suspended its designation of cases subject to audit and has notified the independent accounting firms performing the audits.
The U.S. Trustee saying that is not designating “cases subject to audit” is its indirect way of saying that the audits have stopped, The ones already in the pipeline may well be continuing, although even that’s not clear. But, for better or worse, until further notice, consumers filing bankruptcy are not being audited.