Check 21 -- Proving Tax Deductions Without Cancelled
Checks
Jim
W. Norman, CPA
Check what?
The Check Clearing for
the 21st Century Act (Check 21) became effective on October 28, 2004. The
bottom line on what this means for most consumers is that in time you won't be
seeing any of your checks ever again after you send them off as payment with a
bill or other statement. Instead, Check 21 allows your bank to truncate each of
your checks and create a new electronic negotiable instrument called a
substitute check. After doing this, your bank destroys your original
check.
How does Check 21 change
the way I am able to prove an expense to the IRS in order to be entitled to a
tax deduction or credit?
The short answer is that,
for most taxpayers, Check 21 means you will need to keep your past bank
statements in good order -- IRS says that it will accept bank statements that
contain images of cancelled checks and/or substitute checks. To be used as
proof, an account statement must show check number, amount, payee's name, and
the date the check was posted.
In order to keep track of
your payments more easily for tax purposes, you should also maintain a careful
check register. That way, you'll know on which bank statement to look if you
are ever audited.
Some details
Banks are not being forced
to jump on board to the new electronic Check 21 system. However, most have
already done so and the rest are predicted to follow soon. If you receive
canceled checks with your account statement, Check 21 for the time being will
mean that you might begin to receive a mixture of canceled original and
substitute checks. If you receive image statements (pictures of several checks
on a single page), you also may notice that some of the pictures are of
substitute checks.
The Check 21 law says you
can use a substitute check as proof of payment because it is legally the same
as the original check. The IRS, therefore, must accept your substitute check as
proof of payment.
The IRS also has said that
it generally will accept image statements of substitute checks as proof of
payment. However, as has been IRS policy for image statements of canceled
original checks, if an IRS auditor is suspicious that the image statement is not
genuine, you may be requested to order the actual substitute check from your
bank. This will be a rare instance, however, and only if you are audited. Your
recordkeeping obligations under the tax law are satisfied in the meantime by
keeping your bank statements.
Banking online
What if you do all your
banking and bill paying online? The same rules apply. As a precaution, however,
we suggest that you download and print out your bank statements at the end of
the year. That way, even if you are audited several years from now, you'll have
a record that's easy to access.
Please do not hesitate to
give us a call if you have any further concerns about Check 21.
Jim W. Norman, CPA is a principal with Norman, Johnson & Co., PA, a
Spartanburg Certified Public Accounting firm.
This column is intended to provide you with an informative summary of
the subject matter covered. You should
consult with your tax and legal advisors for details and assistance in applying
this general information to your specific situation. ( http://www.NormanJohnsonCPA.com)
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