In the current banking environment of the Check Clearing for the 21st Century Actand Automated Clearing House (ACH) transactions, it may be surprising that the IRS still requests cancelled checks to substantiate expenditures during some audits. Many individuals and business no longer receive the cancelled checks and some do not even receive copies of checks on their statements. So what does one do if the IRS were to request front and back images of checks? Robert Moise, CPA, recently discussed this situation in the American Institute of Certified Public Accountants article Where’s My Cancelled Check?: A Review of the Basics.
The article explains that the IRS in many cases will accept a “copy” of the check. These include images provided by the bank on your statement or through online services. Retaining bank statements in a secure paper or electronic medium is a good idea and helps meet many recordkeeping requirements. If a copy is not acceptable, you can request the bank provide a “substitute” check that is considered a legal copy according to the Check 21 Act. The author also points out that items processed as ACH transactions (phone and online bill pay services for example) are different than physical checks processed under the Check 21 Act. With ACH transactions it is important to retain bank statements, as the notations on the statement may be the only information available to support the transaction.