IRS Proof of Payment, On-Line Banking & No Cancelled Checks

From: "Anderson, Alfred I." <anderson@mayo.edu>
Subject: IRS Proof of Payment, On-Line Banking & No Cancelled Checks
Date: Thu, 14 Jan 1999 09:51:46 -0600

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Seems like there is a real issue brewing with checking accounts that do not
return cancelled checks.  This is typically the case with on-line banking
where payments may be made directly by an inter-account transfer without any
paper involved.  Or, in the case where a paper check is cut and mailed to
the payee, the paper check is not returned in your monthly statement.

Now enters the IRS rules and regulations which stipulate that you must be
able to prove payment of items that are deducted on your Federal Income Tax.
For example, I have a $1,000 medical bill that I paid with check #4321.  As
proof of payment, the IRS wants me to produce the cancelled check in the
amount of $1,000 with the clearing house stamps on the back.  

Ok, no problem, in the case of the paper check, I can go to the bank that
handles my checking and request a photocopy of the check.  Ever done that?
The photocopy is barely readable.  Also, there is a charge for this service.
What if the IRS wants me to justify all 75 checks I wrote for a medical
problem?  That gets expensive.

Then we have the interesting case of determining the basis of property.  If
I bought a house 10 years ago and put $10,000 into remodeling it and sell it
today.  I can deduct the 10,000 from the "capital gains" of the proceeds.
However, to do this, I must be able to prove that I actually spent the
10,000.  Bills are not sufficient.  Even bills marked PAID are not
sufficient (how does the IRS know that I actually paid the bill?).  Again
they want evidence in the form of a cancelled check.  

With electronic banking, the bank is not going to be able to retrieve a
check from 10 years ago (I asked).  Even if they could, the probability they
could reproduce it today is unlikely (technology advances).

So - is there a misunderstanding on my part - or is there a looming problem
with services that don't return cancelled checks?  Any advice, comments, or
observations would be most appreciated!

Alfred Anderson
Anderson@alum.mit.edu



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