Where's my canceled check?

• Author: Chambers, Valrie

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

The Check 21 Act enables banks to handle more checks electronically so they can process them more quickly and efficiently (Check 21 Act, [section]2). Moving paper checks is costly and slow. When a paper check is first deposited or cashed at a bank, a picture of the front and back of the check is captured and, from that point on, the image is trans-mitted electronically. With agreements between banks and their customers, except where the banks have agreed to provide canceled checks in their statements, the Check 21 Act permits the banks to provide either the original check or a "substitute check" (defined below) "oc by agreement, information relating to the original check (including data taken from the MICR [magnetic ink character recognition] line of the original check or an electronic image of the original check), whether with or without subsequent delivery of the original paper check" (Check 21 Act, [section]3(18)). 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, as it has been doing for many years, 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. Of course, the bank normally has quick access to copies of these checks. In rare instances where the IRS demands more than the copy of the canceled check included in the bank statement, taxpayers can request a substitute check from 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 way you would use the original check" (Check 21 Act, [section][section]4(b)(2), 4(e)).

If a taxpayer receives a substitute check that is not...