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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 4.10.4.3.7.5(6)(C):
"Electronic records are, in
general, considered less reliable than their paper counterparts due to
the ease with which they can be manipulated."
http://wilkencpas.wordpress.com/2011/09/30/the-irs-the-aicpa-quickbooks-and-you/
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:
http://www.uiowa.edu/~fusrmp/irsprocedures.htm
alternative backup site (of the above):
http://traderstatus.com/irsprocedures.htm
Federal Reserve:
http://www.federalreserve.gov/pubs/check21/shouldknow.htm
http://www.federalreserve.gov/pubs/consumerhdbk/electronic.htm
Federal Trade Commission:
http://www.ftc.gov/bcp/conline/pubs/credit/check21.htm
http://www.ftc.gov/bcp/conline/pubs/credit/elbank.htm
QuickBooks Explanation:
http://www.quickbooksgroup.com/qblibrary/articles/whitepapers/check21.pdf
QuickBooks - warning of confiscation by the IRS:
http://www.irs.gov/businesses/small/article/0,,id=238525,00.html
CompleteTax:
http://www.completetax.com/taxguide/text/c60s05d070.asp
Bank of America:
http://www.bankofamerica.com/deposits/checksave/index.cfm?template=lc_faq_check21
Bank of Internet:
http://www.bankofinternet.com/disclosures/check21.asp
JP Morgan Chase:
http://www.jpmorganchase.com/cm/ContentServer?cid=1109172761731&pagename=jpmorgan%2Fts%2FTS_Content%2FGeneral&c=TS_Content
Union Bank of California:
http://www.uboc.com/commercial/main/0,,2485_501206046,00.html
U.S. Dept of Justice Prosecuting Computer Crimes Manual - Network Crime
Statutes
http://www.usdoj.gov/criminal/cybercrime/ccmanual/03ccma.html#A.4.
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.
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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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