With tax time right around the corner, this seems like a good time to remind you to keep receipts for anything that you’re going to claim as a deduction on your tax return. For a business or a rental property, that’s just about everything.  For individuals, it includes charitable contributions, employee business expenses, etc.; you usually don’t need receipts for personal purchases such as groceries, gifts, utilities, car expenses, appliances etc. (although you might need some of those for other purposes, such as warranty claims, for example). You should also keep a canceled check copy or online confirmation of payments for state and local income tax payments, whether a balance due on last year’s return or estimated tax payments for the coming year.

In the “good old days” when everything was done on paper, most people at least had a sense they should hang on to copies for tax purposes. (Whether they actually did or not, or can find them, is a different matter!) Today however, a lot of transactions are going electronic: email, websites, online banking and autopay, etc.  As a result, there’s often nothing tangible in your hands prompting you to ask yourself whether you should keep a copy of it or not. And even if you do stop to ask yourself that question, in many cases you won’t have a copy unless you take the extra step of downloading or printing one right at that moment.

Recent IRS audits of clients we’ve been through have brought to light a growing problem of not having the necessary documentation for electronic transactions, but you can have the same problem in the event of a lawsuit, a warranty claim, or simply needing to research when or where you bought something.  Here are some reminders we hope you’ll find helpful.

Electronic copies of documents are fine if you’re audited, in fact the IRS encourages that.  So even if you do have paper copies, consider scanning them.

If you order or pay bills directly on line, be sure to download and save a copy of every transaction, both invoice and payment confirmation.  The same goes if you receive invoices by email… don’t just keep them in your email software, actually save them to your local computer so all your records are in the same place.  Ditto for your own billings and invoices to customers, if you’re a business.

Sometimes you might receive an email reminder of a balance due or automatic payment coming up, but it won’t necessarily contain all the invoice details. That’s not what you really need.  Don’t just save the email, make sure you have a copy of the invoice itself.

Do not rely on vendors’ systems to reproduce detailed receipts later. Most vendors as a matter of policy will only make available to customers copies of detailed records for a certain period of time (maybe a few months, often no more than a year).  Naturally, that time limit will probably expire just a few days before you need those copies (Murphy’s laws are still alive and well).  But regardless, the records could be permanently lost if you close an account, the vendor goes out of business, they change ownership or computer systems, suffer an electronic breakdown without proper backup procedures (more on that in a moment), or for a host of other reasons.

You still need to do a monthly bank reconciliation, even if you pay everything through a bank’s online bill pay service or don’t keep a traditional check register.  Save an electronic copy of your bank statement and reconciliation every month, and especially at year end.  The same goes for monthly credit card statements.

Although a fear of losing electronic records keeps some people from relying on it, the reality is that if done properly (and that’s an important if), it’s actually safer.  Your paper copies will be gone forever in the event of a flood, fire, building collapse, theft, etc.  The possibility of an electronic loss of records (eg a computer crash) is even greater than with paper… in fact, it’s almost a certainty.  But it’s easy to have extra copies, allowing for greater assurance you’ll have them when needed.  Which leads us to the next point…

BACK IT UP! No matter how you store your electronic records, that system will fail at some point.  It is absolutely essential that you do regular back ups of your records, and keep the back up at another location to safeguard against fire, flood, theft, etc.  Options include a commercial online service or cloud drive, CD or DVD, flash drive, etc.  Don’t rely on fireproof file cabinets to store electronic media, because even if they don’t burn, they will melt.  And if you use a subscription service, you still need your own periodic copies in case that company goes out of business or you decide to switch vendors.

This is so critical, we have to say it again.  You must have a backup system, one which is easy enough that you will actually do it on a regular basis without fail (we recommend daily for active businesses).  And you must test that system periodically by trying to retrieve a document to make sure you can.  If you don’t have regular and reliable back ups, at best you will eventually have a permanent loss of records; at worst, it may quite literally put you out of business.  Backing up your data is not optional!

You need to have some organization scheme for all those electronic documents, so you can retrieve them easily when needed.  That might be by date, by vendor, by category (eg office supplies), or some other schema.  Each has its advantages and disadvantages, but the most important thing is that you use the same method consistently over time, and make sure anyone else who files things for you understands and uses the same method.

Please call us to discuss any questions you might have about electronic record keeping, or for help with developing a system that will work for you.

Neilley & Co. CPAs