Check 21—Proving Tax Deductions without Canceled Checks

The Check Clearing for the 21st Century Act (Check 21) became effective on October 28, 2004. What this means is most consumers no longer receive canceled checks with their statements. Check 21 allows your financial institution to truncate your checks and create an electronic negotiable instrument called a substitute check. Your bank then destroys your original check.

I have received numerous inquiries about how to prove an expense to the IRS in order to be entitled to a tax deduction or credit. The short answer is you will need to retain your bank statements, just as you have always done. Keeping a detailed check register will help you know which statement contains the check you need. The only difference is you now have a substitute document rather than the document itself.

The IRS will accept bank statements that contain images of canceled checks and/or substitute checks as proof of deductions or credits. To be used as proof, an account statement must show the check number, amount, payee’s name and the date the check was posted. However, if the IRS 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, possibly only if you are audited.

Financial institutions were not immediately forced to comply with the new electronic system. However, most have already done so. If your financial institution has not fully complied with Check 21, you may receive a mixture of canceled checks and substitute checks with your statement. 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.

If you do all your banking and bill paying online, the same rules apply. However, we strongly suggest that you download and print your bank statements at the end of the year. You should maintain them as a part of your tax records for that year. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.

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