Hi. I am curious about something and thought I'd ask it here.
If I'm audited, will the IRS accept PDF files and scanned receipts or do I still need to have paper copies?
My bank, credit card, and utilities all allow for electronic-only statements. I'd like to get rid of the clutter of paper documents entirely, or as much as possible. But it really depends on what the IRS allows.
I'm not in any danger of being audited because I've been unemployed for over a year and before that I just had one job that didn't pay a lot of money.
However, I just threw out a whole box of old receipts and statements that were very old and I'm hoping, from now on, that I can keep them electronically on my computer.
One good clue is the fact that e-filing already permits electronic filing of Schedule D-1 materials for those who are active traders.
But even if you're subjected to a "full field audit," unless they discover gross misbehavior, there is little likelihood that they would go back over your entire history; rather, they will be focusing on one particular year.
Certainly, pdf e-files will be acceptable. There are always printers, if letter audits focus in on some specific item, you could print the page(s) that support your filing(s).
Bill, thanks! Part of why I was curious about electronic receipts is that they can easily be forged. It's easier to prove the authenticity of original, hard-copy receipts because they won't all use the same kind of paper, which print-outs would. But if they IRS doesn't care about that then that's great.
I'm not certain that's true. Back in the 1990's when I still worked for the service, it came out with several notices regarding electronic storage of documents, etc., but NEVER trained any of the audit staff that these things were permissible nor that these things weren't to be considered "altered documents." Considering often that the "right hand doesn't know what the left hand is doing" still prevails at the IRS, don't be surprised if the audit gets thrown to appeals, unless the IRS is somehow able to verify your electronic documents with the third parties you did business with.
Plus the fact that any auditor worth his salt will also want to see proof of payment, like cancelled check in which case the check to Capital One will match up with the statement.
You need to read the Rev. Proc. I cited. If you don't follow the rules, the scanned file is not acceptable as proof. Most auditors will probably accept the scan anyway but what about the auditors that insist the rules be followed?
"(2) An electronic storage system must include: (a) reasonable controls to ensure the integrity, accuracy, and reliability of the electronic storage system; (b) reasonable controls to prevent and detect the unauthorized creation of, addition to, alteration of, deletion of, or deterioration of electronically stored books and records; (c) an inspection and quality assurance program evidenced by regular evaluations of the electronic storage system including periodic checks of electronically stored books and records; (d) a retrieval system that includes an indexing system (within the meaning of section 4.02 of this revenue procedure); and (e) the ability to reproduce legible and readable hardcopies (within the meaning of section 4.01(3) of this revenue procedure) of electronically stored books and records."
I would hate to lose a deduction just because I was too lazy to read the rules and come up with a simple written plan that I then followed. I don't think following them is that hard for an individual.
Item b might be as simple as "I will encrypt the folder(s) where I store my tax records. I will make a backup to an encrypted folder on a USB drive on a regular basis, at least monthly/annually that I will store in my fire proof safe/safe deposit box/home(if you keep records at your office)."
Perhaps the procedure to comply with item c is written as: "I will count the pages to be scanned and compare the total to the number of pages in the PDF, TIFF, etc. I will page through the computer file to see that each page is legible."
Item d could be as simple as: "I will scan receipts by tax year. Income will be stored in a subfolder called "income" and deductions will be stored in a subfolder called "deductions."
Of course someone with a complex tax life would need a more detailed system. No guarantees that my off the cuff plan will work and it does not address the entire Rev. Proc.
I believe the above applies to electronic systems of keeping records. If one instead has a paper system of keeping records, then that paper system can include paper documents that were once electronic but have been printed out.
However, I would think printing them out contemperaneously is better than doing so right before an examination....
In article , snipped-for-privacy@hotmail.com (Drew Edmundson) writes: | On Tue, 18 Aug 2009 13:45:09 EDT, HLunsford | wrote: | | snip | | >> Certainly, pdf e-files will be acceptable. There are always printers, | >> if letter audits focus in on some specific item, you could print the | >> page(s) that support your filing(s). | >> | >Plus the fact that any auditor worth his salt will also want to see | >proof of payment, like cancelled check in which case the check to | >Capital One will match up with the statement. | | You need to read the Rev. Proc. I cited. If you don't follow | the rules, the scanned file is not acceptable as proof. Most | auditors will probably accept the scan anyway but what about | the auditors that insist the rules be followed?
What about electronic records that are delivered to you in that form to begin with? I'm not interested in scanning existing paper records but more and more companies want to stop sending paper at all. (Some now charge extra for paper.)
Cancelled checks are of course becoming rare. A few banks were willing to "return" legal substitute checks instead, but my bank that does this recently sent a letter saying that while they "respect my choice" to receive the documents they won't be able to provide them in an increasing number of cases. (Given that Check 21 requires that substitute checks be available but does not require that they be provided at no charge I assume this letter really means not that my bank won't be _able_ to provide them but that they want to start charging.)
Banks that previously returned images that were not legal substitute checks (front only) now seem to feel that even this is too much and suggest that you view the images online. It is possible to print those images but for one bank I use it requires some effort to get around what might be intentional obfuscation or might just be bad site design.
This all raises the question of how much time and money should be spent to _create_ paper records where none exist (or at least none exist in my possession) by default. Also, to the extent that I do create paper records from electronic ones it isn't clear why they would not be subject to the same complaint that I might have altered the electronic version before printing it.
"This revenue procedure provides guidance to taxpayers that maintain books and records by using an electronic storage system that either images their hardcopy (paper) books and records, or transfers their computerized books and records, to an electronic storage media, such as an optical disk."
So it applies to paper documents that are scanned and to documents electronically generated. It is spot on to the OP question.
I agree wholeheartedly that the above procedure applies to the OP's query as to whether he can keep records electronically, with no paper system involved. I was hypothesizing a different scenario, which was also alluded to in Dan Lanciani's post, in which the TP's recordkeeping system is a paper system, but some of the incoming documents are electronic. I believe that the above procedure does not apply in this case.
As an extreme example, if one has a paper recordkeeing system, and purchases something at Office Depot, then the receipt is an electronic document that was printed out by a printer in the point of sale device. This does not invoke Proc 97-22, I am pretty sure.
Pub 583 specifically treats the situations where there is no physical cancelled check, or no physical credit card receipt. These are discussed as being compatible with paper recordkeeping. It then later states that records maintained in an electronic system invoke 97-22. My belief is that electronic receipts printed out contemporaneously are not "maintained" electronically.
If the mere existence of electronic-only cancelled checks requires 97-22 to be followed it would have been nice for the IRS to directly say this in their publication...
I apologize but that is not how it came across. Perhaps you should have replied to Mr. Laciani's post instead of mine since it was the one you were starting with.
I agree as long as you keep the paper document. Once you scan it then the Rev. Proc. applies.
Publications are not authority. Revenue Procedures are authority. An old fashioned electric adding machine could be called an "electronic system" but the Rev. Proc. seems to be pretty clear it is referring to electronically archiving records that exist in some other format (paper, electronic, etc.).
It would be nice if IRS said a lot of things. We often wait decades for regulations to be promulgated. Stepping onto my soapbox, if some people (not implying you are one of them) weren't set on finding a loophole and instead followed the spirit of the law, fewer rules would be required. Stepping off soapbox.
If you receive a document in electronic format and keep it in that format, the Rev. Proc. does not apply. However if you receive it electronically, print it out, and then scan it the Rev. Proc. applies. If you receive it electronically, add it to your electronic storage system where it is converted from a PDF to a TIFF, and delete the original then the Rev. Proc. probably applies. I dump my office power bill and several others I receive only electronically into a folder in the original PDF. I do not add or delete anything from the PDF as received from Progress Energy.
It can be simpler I think -- "I will establish a password to login to my computer". In addition, when other users log in to their account, they should not have read access to the files in your folder.
Agree. The act of creating folders and subfolders is itself an act of indexing.
Of course, a large corporation would want more, just as clearance levels to various folders, auditing of changes (so when you change the status the date, who made the change, etc is logged), versioned file systems (so that each revision to the file is saved), etc. It's a big business in the software industry.
If that is all you do, I call pull your hard drive out and put it into my computer and have complete access to everything on your hard drive. Encryption is the best way to go. With free software like TrueCrypt and the included EFS (although it is as weak as your password), why fight it?
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