Does The IRS Allow Digitized Receipts in the Event of an Audit?

by | Apr 15, 2019 | IRS, Tax Advice

Keeping track of receipts for tax-deductible expenses can be a hassle.  File cabinets stacked with invoices and wallets filled with paper receipts take up time and space and can become downright annoying.

One solution to this problem is to convert paper receipts and other tax-related documents into digital files.  That’s correct, the IRS does not require original paper receipts in the event of an audit. In fact, the IRS has advocated for “electronic storage systems” for tax-related documents since 1997.  With the advent of smartphones and easily accessible file hosting services, the solution is more practical than ever.

In order to properly store digital copies of your tax-related documents, the IRS provides the following guidelines:

  • Make sure the digital scan or image contains the name and address of the vendor, along with the amount paid and the date of the transaction.
  • Make notes for each receipt documenting the business purpose and any other information that may be required. For example, the rules regarding meals and entertainment expenses require you to document the names of the people entertained.
  • Be able to print a hard copy if necessary, in the event of an IRS audit.
  • Make sure the digital files are properly backed up. “My hard drive crashed” is not a valid excuse in the event of an IRS audit.

So how does one go about going paperless for tax receipts?  There are a number of smartphone apps that provide users with the ability to organize and store digital receipts, such as Expensify and Shoeboxed.  Another approach is to setup up a “tax receipt” folder on a file hosting service such as Dropbox, and simply upload scanned images from a computer or photos directly a smartphone.

For example, after entertaining a client for lunch, a business owner might make a handwritten note on the receipt to document the name of the client and the business purpose, and then simply take a photo of the receipt.  Once she confirms that the photo is clear and legible, she can upload the receipt to a “Meals and Entertainment” folder on her Dropbox site using the Dropbox app right on her phone.  Once that process is complete, the paper receipt can be thrown away.

Whichever approach you may take, the most important thing is to be consistent, add notes where necessary in a timely manner, and follow the guidelines outlined above.  As for the paper, good riddance.

Contact us for any questions about tax planning and record keeping.

Schanel & Associates is a CPA firm specializing in accounting, tax, business valuation and litigation support serving Palm Beach, Martin and St. Lucie Counties and beyond since 1993. Our CPAs and accounting professionals work with individuals, businesses, estates and trusts to provide everything you need under one roof. For more information, contact us today at 561-624-2118.

Todd Schanel has been a principal at Schanel & Associates since 2004, where he specializes in financial planning, tax planning and consulting services. He also serves as Founding Principal and Director of Investment Advisory Services at Core Wealth Management, our sister company, where he leads an accomplished professional team offering independent and objective financial advice to help clients achieve their financial goals. Todd has been a CFA Charterholder since 2005, and in 2007 he earned his Certified Financial Planner® designation and became a licensed CPA. In 2015, he earned the Certified Valuation Analyst (CVA) designation.