Where’s My Cancelled Check?

cancelled checksThe Check Clearing for the 21st Century Act (Check 21 act), P.L. 108-100, was signed into law on October 28, 2003 and went into effect on October 28, 2004.  For most consumers, this means that they now receive scanned images of their cancelled checks in bank statements rather than the actual cancelled checks: in some cases, they are not receiving even those.  However, during an IRS audit, some IRS requests for information insist on substantiation expenders with front-and-back copies of cancelled checks.

The Check 21 Act enables banks to handle more checks electronically so the can process them more quickly and efficiently.  Moving paper checks is costly and slow. When a paper check is first deposited or cash at a bank, a picture of the front and back of the check is captured and, from that point on, the image is transmitted electronically.   After doing this, the bank generally is allowed to destroy the original check as provided in its customer agreement.

What happens when the IRS conducts an examination and asks for a canceled check to substantiate payment of an expense?  Usually, the IRS accepts a copy of the canceled check.  So taxpayers must take extra care to protect the copies of checks that may accompany their bank statements.  The bank normally has quick access to copies of these checks.  In rare instances where the IRS demands more that the copy of the canceled check included in bank statements, taxpayers can request a substitute check for the bank.  A substitute check is legally the same as the original check if it accurately represents the information on the original check and includes the following statement: “This is a legal copy of your check.  You can use it the same as you could use the original check.”

If a taxpayer receives a substitute check that is not legally the same as the original check and suffers a loss related to this substitute check, the Check 21 Act provides that taxpayer with a special procedure that can be used for restitution.

The IRS has indicated that it generally will accept photocopies of substitute checks as proof of payment.  However, as has been IRS policy for copies of canceled original checks, if an IRS auditor suspects that the copy is not genuine, he or she may ask the taxpayer to order the actual substitute check from the bank.  The taxpayer’s general record-keeping obligations under the tax law are satisfied by keeping the bank statements.

Note that the Check 21 Act procedure is far different form the electronic conversion process that has been in use for many years, in which the bank customer’s check is converted to an Automated Clearing House (ACH) debit.  The money is taken out of an account, or the taxpayer may authorize an electronic check and pay a bill by telephone or online.  Customers’ rights using ACH debits and electronic checks are far different from their rights under the Check 21 Act, since the only record of an electronic check may be the notations on the bank statements.

The key points to remember with the Check 21 Act are:

  • If a taxpayer is receiving canceled checks now that will continue until the bank sends notification to the contrary.
  • If taxpayers have online access to bank statements, they should download and save the electronic copy of the statements and checks as a backup.
  • Banks are not required to keep original checks for any specific length of time, and the Check 21 Act does not add any retention requirement.
  • Banks are required to notify customers if they change the way they have been providing canceled checks or copies.
  • Banks may provide a substitute check but are not required to do so.  Customers need to understand what their bank will provide.
  • Even if the bank does provide a substitute check with the proper language, it may charge for this service.