You Make the Call - Jan. 25, 2024

Question: Joe Williams, a new tax professional, agrees to represent a friend who is not his client, Wanda Round, in an IRS audit of her small business that operates as a sole proprietorship. The IRS is requesting all actual receipts for her claimed business expenses. Wanda explains that she scans her receipts into commercially available software as she receives them and then all physical receipts are shredded. Will the IRS accept printouts from the software as proper substantiation for expenses claimed?

Answer: Yes, if the scanning meets what the IRS has been accepting as digitized or scanned versions of paper documents since 1997 in lieu of paper documents. Rev. Proc. 97-22, §4.01 outlines:

• Taxpayers must ensure "an accurate and complete transfer of the hardcopy or computerized books and records to an electronic storage media. The electronic storage system must also index, store, preserve, retrieve, and reproduce the electronically stored books and records."

The digitized or scanned versions of a paper document must resemble the paper version. No alterations should be made to the digital document. Any handwritten content may not be recorded using OCR (Optical Character Recognition, a technology that allows computers to read text, for example, text on a scanned memo or text in a photograph) because it would not be searchable.

It is still likely a good idea to archive all original backup documents in paper form. Software or hardware can fail, and electronically saved data can be lost.

For a more detailed discussion of Rev. Proc. Rul. 97-22, visit: https://www.irs.gov/pub/irs-tege/rp-97-22.pdf.