Check 21 -- Proving Tax Deductions Without Cancelled Checks

By now you must have noticed the growing trend towards remote deposit of checks. Owing to the increasing sophistication of smartphones, you can now photograph a check written out to you and digitally send it to your bank for deposit. All this and more became possible after the Check Clearing for the 21st Century Act (Check 21) became effective in 2004. What it meant for most consumers then is that most banks discontinued the practice of retaining a paper version or copy of your checks. Check 21 allowed banks to truncate each of your checks, create a new electronic negotiable instrument called a substitute check, and then destroy the originals.

This industry change has important tax consequences for taxpayers who previously used checks to substantiate their expenses or charitable contributions. But the bottom line is that Check 21 allows you to use a substitute check as proof of payment because it is legally the same as the original check. The IRS, therefore, must accept your substitute check as proof of payment.

Banking online

Many of you may have switched to online banking. If so the IRS will accept image statements of substitute checks as proof of payment. If, however, an IRS auditor is suspicious that the image statement is not genuine, you may still be requested to order the actual substitute check from your bank. This will be a rare instance, however, and will likely occur only if you are audited. As an additional precaution, we suggest that you download and print out your bank statements at the end of the year. That way, even if you are audited several years from now, you'll have a record that's easy to access.

If you still rely on paper bank statements and paper copies of your checks, keep them in good order. The IRS will still accept bank statements that contain images of cancelled checks and/or substitute checks. To be used as proof, an account statement must show check number, amount, payee's name, and the date the check was posted. In order to keep track of your payments more easily for tax purposes, you should also continue to or begin to maintain a careful check register. That way, you'll know on which bank statement to look if you are ever audited.

Please do not hesitate to call this office if you have any further concerns about Check 21.