I have a document scanner and scan many paper records and store them as PDFs in case they are needed for tax purposes in the event of an audit.
I started to wonder in the event of a tax audition, how much proof do I need to show things like I paid the utilities for my business, which are a deduction. For example, the electric company sends me an invoice, but I’ve paid for this with autodebt from the checking account. In the checking account’s statement it shows an autodebt of X amount from the electric company. In the event of a IRS tax audit, do I really need to show the actual electric company invoice/statement or is pointing to the autodebt in the checking account statement for the electric company, is that good enough?
What about the phone company? I have them on auto-charge to my business credit card, is showing a charge from the phone company on a credit card statement good enough for a tax audit or do I need the invoice/statement also?
While I am not a tax attorney I have worked in the tax clinic at my law school. Being that I am not an attorney let me disclaim that I am not giving you legal advice so if you are seeking legal advice you should contact a tax attorney. With that out of the way, if you can easily recall the amount paid and when it was paid then it should be okay to only have the bank record. However, I would keep any record that will verify the amount you are claiming for deduction or credit for 10 years. This will account for the statute of limitations the IRS has to pursue any sort of audit. It can definitely be a scanned document though you don’t have to keep the paper copy.
It depends on what the auditor is looking for. If he suspects you are charging your whole family’s cell phone bills to your business account and trying to deduct that as a business expense, he may want to see what exactly it is that you are paying the phone company for. Or you may be getting a combined electric bill for your business, your home, and your mistress’s apartment and trying to take a deduction.
If you were trying to do something like that (and I’m sure you aren’t), you wouldn’t be the first small business owner that the auditor saw doing that.
You should keep detailed information supporting your tax records for a minimum of 7 years. I line item on your credit card or bank statement is not sufficient support.