ASK KIM
Save Electronic Checks for Your Taxes
by Kimberly Lankford

If my bank stops sending canceled checks, what would I need to keep for tax time to prove I made a charitable contribution or a deductible business expense? And what about bills I paid through my bank's online bill-paying service -- what documentation do I need to keep for my taxes when I pay bills that way?

The Check Clearing for the 21st Century Act -- also called Check 21 -- goes into effect Thursday. The new rules make it easier for banks to process checks electronically without having to wait for paper checks to physically change hands. But most of the changes are behind the scenes. You'll still have plenty of documentation for your tax files.

Your bank may no longer send you the canceled checks, but you should still be able to download copies of the canceled checks from the bank's Web site or you may receive images of canceled checks with your bank statement, generally at no extra cost, says Richard Winston, a partner in the financial services group of Accenture, a management consulting and technology services company. The IRS accepts either of those documents for tax purposes.

Or you may only be able to get a copy of the substitute check, which is the check image that more banks will share with each other electronically under the new rules.

"Check 21 makes substitute checks the legal equivalent of originals," says Mildred Carter, senior tax analyst with CCH Tax and Accounting. "The IRS has agreed to accept the substitute checks as proof of payment."

If you paid your bills online, then the new law won't change the documentation you receive. In that case, your bank statements will continue to include a line or so with the details about each online transfer you've made.

"According to the IRS, any proof offered by the taxpayer that shows the amount of the cashed check and to whom it was paid is adequate substantiation," says Carter.

But it's a good idea to back up your bank records with a receipt or statement verifying that you've paid the bill -- each month's phone or electric bill, for example, generally includes a line listing how much money they received from you the previous month.

If you're giving more than $250 to a charity, you'll need to get a receipt from the charity anyway, says Bill Cafero of Ernst & Young. In that case, a canceled check wasn't enough for tax purposes even before the law changed. See IRS Publication 526, Charitable Contributions, for more information about which records you need to keep.

If you're paying for something that is tax deductible and isn't easy to get a receipt -- if you're making a small donation to a charity, for example, or want to prove that you made your quarterly tax payments to the IRS -- then it's best to pay by check rather than online, says Cafero.

No later than the end of the year, go to the bank's Web site and print out all the check images you'd need to verify your return. Keep them in your tax files. Even though they're available online now, they may be deleted after a period of time (check with your bank). Keeping the printouts will help you avoid a lot of stress if your return is audited in two or three years.