Keeping receipts for your taxes is not only necessary to deducting the correct amount, but also ensures your deduction holds up under examination. The U.S. tax system works largely on the honor system, but the Internal Revenue Service conducts audits of tax returns every year to keep people honest. Fortunately, as long as you meet certain requirements, you can clear out the shoeboxes full of receipts by scanning and storing them electronically.
Revenue Procedure 97-22
The IRS formally set out rules for how it would treat electronic records back in 1997. Issued as a Revenue Procedure, the rules stipulate that as long as certain concerns are addressed, the IRS would treat electronic records the same as written records. The electronic storage system must provide a way for an auditor to check whether records had been altered, and be able to produce a legible hard copy from the file.
What Would Qualify
The Revenue Procedure constitutes part of the body of tax law, and so it was written in very legalistic language. Although that makes it less straightforward to read, it covers technology, such as cloud storage, that has developed since it was introduced. Your scanned copies must be legible and readable, and the auditor must be able to print it. Unlike written records, electronic records can readily be altered without a trace. Qualifying storage systems must keep an audit trail that shows when and how the documents were altered. For example, burning scanned documents to a DVD-R at the end of each year and maintaining the files on a separate hard drive provides an audit trail and backup against hard drive failure.
A contemporaneous, written record is the most reliable form of documentation you can have for tax purposes. Fortunately, many expenses don’t need to be documented in writing to stand up under an IRS examination. The Cohan Rule allows taxpayers to make reasonable approximations for many of their deductible expenses, but some expenses, such as business meals and travel, are only deductible with written documentation. You must maintain your records for as long as your return is subject to audit by the IRS.
Statute of Limitations
Typically, you only need to keep your documentation around for three years from when you filed. That means you need to keep your 2012 documentation until April 15, 2016, assuming you filed on April 15, 2013. If you failed to file or filed fraudulently, you need to keep your documentation forever because no statute of limitations curtails when the IRS can audit that tax year. If your return substantially understates your income, then the statute of limitations doubles to six years from when you filed.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005. His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce. He currently advises families on their insurance and financial planning needs.