An IRS Audit..and They Require Copies of Canceled Checks

An IRS Audit can require you to substantiate expenditures with front and back copies of canceled checks according to an article that I read yesterday on the American Institute of CPAs (AICPA) website, are you going to be prepared if that happens to you?

Perhaps you haven’t received your canceled checks back from your bank in years, or perhaps your bank has even stopped providing you with printed images of those checks with your bank statement, like mine has – and I must confess I can’t even remember when they stopped doing that with our business account – but I do know that it’s been several years.

Perhaps like me, when your bank stopped returning your canceled checks or stopped providing you with images of them with your bank statement; you sighed a huge sigh of relief and said to yourself – that much less that I have to find room to file/store.

I’ve used “voucher style” checks for years, and have always recommended their use to clients and customers over the years – and that they print their checks using QuickBooks and attach one of the vouchers to whatever bill or invoice they paid as “proof”.

I guess that was pretty silly of me!  Have you made that same mistake as well?

So what happens when during an IRS Audit you are asked to produce cancelled checks to substantiate the payment of an expense?  Here is the highlights of the article from AICPA (but do go read it yourself).

Usually, the IRS accepts a copy of the cancelled check – copies include a *substitute check* or information relating to the original check – including data taken from the MICR (magnetic inch character recognition) line of the original check or an electronic image of the original check.

*A substitute check is legally the same as the original check if it accurately represents the information on the original check and includes the following statement:  “This is a legal copy of your check.  You can use it the same way you would use the original check.”

The article suggests that if you have online access to bank statements, that you should download and save the electronic copy of the statements and checks as a backup – which is very good advice (and that’s what Cheryl will be doing when she gets back from vacation – poor Cheryl!).

You also need to be aware, that even if the bank does provide a substitute check with the proper language, it may charge for this service.

I’m also going to ask my Tax Preparer friends about this next week at the McTax Google+ hangout and I’ll post back with more information on what to do – maybe I can even get one of them to do a guest blog post about this subject.