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The IRS recommends individuals and businesses maintain financial and tax records in a safe and secure manner.  In light of floods, fires and other natural disasters taxpayers should consider utilizing "paperless recordkeeping."  An good way to protect financial records is to receive bank statements and documents by e-mail or online downloads and maintain a multiple copy backup system with copies held at several different locations (such as your office, your home, your safe deposit box and uploaded to a reputable online archival service).

Important tax records, such as W-2 forms, tax returns, and other papers, can also be scanned into an electronic format. Taxpayers who have all financial records in electronic format can further protect them by periodically copying the records onto a "key" or "jump drive" or burn them to a CD or DVD to be sent to a relative in another city for safekeeping in case the taxpayer's normal computer backup systems are destroyed.

If your financial institution does not provide you with cancelled checks, you can rely on an account statement that shows for each check: the check number, amount, payee, and date the check amount was posted. For various purposes, a validated printed image of your actual check may be needed as well.

Similarly, statements showing electronic funds transfers or credit card statements can also be used. However, these statements should not be your only record of your expenses. You should also have another form of proof for each expense, such as a receipt or an invoice.

The IRS does not require you to keep any specific forms of records, so long as your records clearly, accurately and verifiably show your income and expenses for the period. If you use a computerized system with electronic records, you must be able to obtain printouts of the records that are easily read and verified.

Since the numbers in electronic records and images can be readily modified with various software programs it is important to maintain additional independent, verifiable support documentation for important items.

In the United States, covering up and lying about a wrong-doing is oftentimes worse than the original deed itself.  It is no different when dealing with your financial records.  All electronic data must be clearly verifiable and untampered with!

Be forewarned of the IRS policy and awareness as found at  Internal Revenue Manual  "Electronic records are, in general, considered less reliable than their paper counterparts due to the ease with which they can be manipulated."


Why Retain Documents and Records?

Keeping Good Records
Preparing to meet your annual tax obligations is a year-round process. For example, everyone who pays taxes is required to keep accurate, permanent books and records so they can determine the various types of income, expenses, gains, losses, and other items that affect their income tax liability for the year.

Everyone who pays taxes is required to keep accurate, permanent books and records so they can determine the various types of income, expenses, gains, losses, and other items that affect their income tax liability for the year.

Individuals should retain basic records showing the source of all income you receive, including W-2 forms, 1099 and 1098 forms, and year-end comprehensive statements from financial institutions.

For any deductible item, you should retain documents proving the expense itself (a receipt, bill, or invoice) and proving that you paid it (a canceled check, credit card slip, or bank statement itemizing your checks).

If you receive or pay alimony, you should keep a copy of the separation agreement or divorce decree.

If you are claiming charitable donations, you may need proof of payments plus charity issued receipts and in some cases certification from the charity and detailed appraisals of property donated.

If you are claiming the child care credit, you should keep records of the name, address, and Social Security number or TIN of each caregivers.

If you have gambling winnings, you should be keeping a diary of your winnings and losses that includes the date, type of activity, and location of the establishment, the names of other people who were present, and the amount you won or lost.

If you are claiming employee business expenses keep in mind that  the recordkeeping rules for each type of expense are the same as those that apply to business owners.

Business owners must retain basic records documenting income and disbursements.  Special more detailed recordkeeping rules apply to automobile and travel, meals and entertainment, capital assets (fixed assets, long-term assets or investments) and various items that might be considered to provide a benefit the owners such as: health insurance, retirement plans, office in the home, education and so on.

Types of paperless banking records:

  • Check 21 a/k/a substitute checks.
    • Once an original paper copy is destroyed it must be available to be reproduced and verified as official documentation when required.  Banks only retain these images for several years and they often charge a fee for each image reproduced.
    • What is a substitute check?
      A substitute check is the legal equivalent of the original check if it meets the following requirements:
      • accurately represents all of the information on the front and back of the original check as of the time the original check was truncated;
      • represents the MICR line of the original check; and
      • states that "This is a legal copy of your check. You can use it in the same way you would use the original check."
  • Electronic monthly bank statements along with electronic imaged substitute checks.
    • These must be available to be printed and verified as official documentation when required.
    • Banks only retain these images for several years.  Sometimes there is a charge for each page reproduced.
  • Electronic online banking, online bill paying services.
    • These must be available to be printed and verified as official documentation when required.
    • Monthly statements list your electronic payments.  You need to retain additional documentation to verify and support the items listed.
  • ACH / NEACH, direct deposits and other electronic debits and credits.
    • Monthly statements list these.  You need to retain additional documentation to verify and support the items listed.

Check 21 means that banks may stop shipping original physical paper drafts (checks) from bank to bank. Rather a bank (or other authorized party) may make a "Check 21" electronic image and digital recording of the check information and then destroy the actual original check. Then this electronic information can be sent around from bank to bank instantly, and when it gets to YOUR bank, they will print it out on paper and mail it to you. That printed paper of the Check 21 IMAGE is a legal substitute for the original check that you wrote.

Electronic monthly bank statements and Electronic monthly brokerage statements are legally allowed if the customer opts in. There are benefits for these including: the bank saves handling, paper and postage. The customer has less paper sitting around his house. The customer may actually prefer to view his statements online from anywhere in the world, rather than look for an envelope that was mailed to his home.

The banks and brokers like this new ability because they save handling, paper and postage by shifting the burden to the customer who can supply his own paper, toner, printer, his time and effort to print the statements himself. If the customer chooses not to print/save the statements, that's his problem.

To help alleviate "his problem" the bank/broker make the electronic information available online for a couple months to as long as for several years.  Beyond those months/years the bank makes a nice fee when the customer realizes he needs paper copies as proof of his banking or broker activities. Example: Bank of America charges $3.00 per check that you need but have not printed during a 65 day window before it is taken off-line.

Caution: Not all copies of a check are substitute checks. For example, pictures of multiple checks printed on a page (also known as an image statement) that is returned to you with your monthly statement are not substitute checks. Online check images and photocopies of original checks are not substitute checks either. You can use image statements and other copies of checks to verify that your bank has paid a check.

If you receive something other than a substitute check, be aware of your rights to resolve errors under other state and federal laws.

Links for additional information:

Relevant IRS Procedures and Rulings Pertaining to Records:
alternative backup site (of the above):

Federal Reserve:

Federal Trade Commission:

QuickBooks Explanation:

QuickBooks - warning of confiscation by the IRS:,,id=238525,00.html


Bank of America:

Bank of Internet:

JP Morgan Chase:

Union Bank of California:,,2485_501206046,00.html

U.S. Dept of Justice Prosecuting Computer Crimes Manual - Network Crime Statutes

IRS Rules:

Financial Account Statements: Certain financial account statements are accepted by the IRS as proof that payments were made by check, credit card, or electronic funds transfers. Rev. Proc. 92-71, 1992-2 C.B. 437. Taxpayers with the accepted statements are not required to have original canceled checks or charge slips. Account statements prepared by a financial institution is acceptable as proof of payment if it shows:

  • A check clearance. The statement must show the check number, the amount of the check, the date the check was posted to the account, and the name of the payee.
  • An electronic funds transfer. The statement must show the amount of the transfer, the date the transfer was posted to the account, and the name of the payee.
  • A credit card charge. The statement must show the amount of the charge, the date of the charge, and the name of the payee.

§3 of Rev. Proc. 92-71, 1992-2 C.B. 437.

If the taxpayer cannot prove payment of an amount by providing a canceled check or an account statement as described above, other evidence of payment can be provided, such as a combination of: (1) an invoice marked "paid"; (2) a check register or carbon copy of the check; and (3) an account statement that shows the check number, date, and amount. §4 of Rev. Proc. 92-71.

Tips: The only records that an employer is required to keep in connection with charged tips are charge receipts, records necessary to comply with the tip reporting requirements of §6053(c), and copies of tip statements furnished by employees under §6053(a). §6001. Tip records must generally be maintained for three years after the due date of the return or statement to which they pertain. Regs. §31.6053-3.

  FAQ: Do I need to retain original business expense receipts if I scan them into my computer?

Many taxpayers maintain books and records by using an electronic storage system that either images their hardcopy books and records to an electronic stage media, such as an optical disk. Records maintained in an electronic storage system that complies with certain requirements will constitute records under Code Sec. 6001.

Code requirements
Code Sec. 6001 provides that every person liable for any tax imposed by the Code, or for the collection, must retain records. Any person subject to income tax, or a person required to file an information return, must maintain books and records, including inventories sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown.

A taxpayer’s electronic storage system that meets certain requirements will be treated as being in compliance with the recordkeeping requirements of Code Sec. 6001.

Special Rules
The definition of books and records goes beyond the typical hard copy items when you maintain all or part of your accounting records on a computer. In general, record-retention periods are the same for “machine-sensible” records as they are for their hard-copy counterparts. Machine-sensible records include magnetic tapes, punched cards and computer disks.

Where machine-sensible records are concerned, however, retrievability is important. Not only must certain records be maintained, but the IRS must have access to those records. This becomes especially burdensome when computer systems are upgraded.

If you or your business have more than $10 million in assets*, and you maintain all or a portion of your accounting records on a computer, the IRS requires that your machine-sensible records be in a retrievable format and provide the information necessary to determine the correct tax liability. This requirement applies even if your accounting system is maintained by an outside service bureau. To comply with this requirement, you must retain the following specific documentation for all data files:

  • Record formats (including the meaning of all the codes used to represent information)
  • System and program flowcharts
  • Label descriptions
  • Source program listings of programs that created the files retained
  • Detailed charts of accounts
  • Evidence that periodic tests are performed on the retained records to ensure they can produce the data stored in the records
  • Evidence that the retained records reconcile to the taxpayer’s books and the tax return

If you or your business have less than $10 million in assets, but you nevertheless maintain all or a portion of your accounting records on a computer, the IRS requires you to conform to the above standards if (1) your books and records are only available in machine-sensible format, (2) machine-sensible records were used for complex computations (such as LIFO) or (3) you are notified by the IRS that your machine-sensible records must be maintained.

* Members of a controlled group of corporations are combined for this purpose.

Taxpayers’ responsibilities
The IRS permits the destruction of the original hardcopy books and records and the deletion of the original computerized records once the taxpayer has:

  • Completed its own testing of the electronic storage systems that establishes that hardcopy or computerized books and records are being reproduced in compliance with certain requirements; and
  • Instituted procedures that ensured its continued compliance with these requirements.

Click here for more information on electronic records.

Click here for more information on planned record purging and destruction.



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