Scanned Receipts for the IRS: Can You Shred the Paper?

Can I keep digital copies of receipts and shred the paper?

A scan or photo can replace the paper receipt, but only if three things are true first: your setup can find, show and print every receipt legibly (the IRS calls this an electronic storage system); you have tested it; and you have procedures that keep it working. If any is missing, keep the paper. The standard is in Publication 583 and, in detail, Revenue Procedure 97-22, which Publication 583 and the IRS automated records page still point to.

That rule dates from 1997 and speaks of "electronic storage systems," not phones or apps. The IRS guidance cited on this page does not mention phone photos or receipt apps by name. Whether a particular app qualifies depends on its facts: how it indexes, whether each image can be retrieved and printed, who controls access, and how long it keeps files.

If the paper is gone and the system falls short, the IRS may issue a Notice of Inadequate Records and apply applicable penalties, including the accuracy-related penalty. Penalties may not apply if the original records are kept (Revenue Procedure 97-22, sections 6.02 and 9).

A case is not simple when years of paper are about to go or already have, when the images live only in an app whose subscription could end, or when the IRS has already asked for records.

Gather first: a few sample scans (include a faded one), the app's terms, your retention schedule, where your backups live, a list of what is already shredded by year, and who holds the app login.

What must my scanning setup do before I shred the paper?

Revenue Procedure 97-22, section 4 requires the setup to copy each receipt completely and accurately, then index, store, preserve, retrieve and reproduce it in legible form.

The controls must be reasonable, and the index must work about as well as a reasonable paper filing system (sections 4.01 and 4.02). Using a service provider does not shift the responsibility: the taxpayer remains answerable for the system (Revenue Procedure 97-22, section 3.03).

What do I have to test and write down before throwing paper away?

Two things, both before you shred: finish your own testing, which shows the system reproduces the paper in compliance with every requirement, and put procedures in place that keep it compliant (Revenue Procedure 97-22, section 7). The revenue procedure sets no test format or sample size. Writing down what you did is how you can show it later; that part is practice, not an IRS rule.

Capture well first (practice, not an IRS rule): photograph the whole receipt flat, in even light, both sides if there is print on the back, and scan thermal receipts within days, before they fade. Check each image on screen before you move on.

1. Describe the system. Write down how each receipt is captured, named, filed and linked to the books, and where it is stored. The IRS can ask for this description.
2. Pick a sample. Cover different vendors, months and kinds of paper, including your thinnest or oldest receipts.
3. Run the test. For each item, find it using the index alone, display it, print it and compare it with the paper. Every number must be readable.
4. Record the result. Note the date, who tested, what was sampled, what passed, and what you fixed.
5. Set the routine. Scan by a set date, spot-check on a schedule, and keep a backup.
6. Shred only what the test covered.

If anything fails, keep the paper: the penalties above may not apply if the original records are still kept (Revenue Procedure 97-22, section 6.02; Publication 583).

If you already shredded paper, run steps 2 to 4 now on the images you have and write down the date and result. The revenue procedure permits destroying originals after testing and setting procedures, so shredding first is outside what it describes, and the IRS pages cited here do not say how an examiner treats that. Where an image fails the test, treat that receipt as lost: see lost receipts for business expenses.

Which paper should I keep even after scanning?

Keep any receipt the image cannot show legibly and completely. The revenue procedure lists keeping paper that is illegible, or that cannot be accurately or completely transferred, as a recommended practice (Revenue Procedure 97-22, section 4.03).

A receipt that arrived by email or from a vendor's site was never paper. Keep that file in the same indexed place, readable and retrievable for as long as a paper receipt. The IRS guidance cited here does not say to print it.

Is a bank or card statement, or my app's bank feed, enough without the receipt?

Not on its own. A statement is proof of payment: it shows who was paid, when and how much, not what was bought or why. Publication 583 lists account statements among expense documents, but says proof of payment by itself does not establish a deduction, and to keep documents such as credit card sales slips and invoices to show you also incurred the cost (Publication 583). A canceled check alone does not prove business purpose either (Publication 463).

Keep the receipt with the statement wherever the expense needs more than proof of payment. What a statement must show, and the small-expense rules in Publication 463, are in IRS receipt requirements.

The IRS pages cited here do not say a bank feed counts as a statement. For a feed that is not a reconciliation, see bank feeds are not reconciliation. If the receipt is already gone, see lost receipts for business expenses.

What must the saved image show for the expense to hold up?

The image should show what the paper showed, enough to prove the amount paid and that it was a business expense (Publication 583). For travel, gift and car expenses, Publication 463 ordinarily treats documentary evidence as adequate when it shows the amount, date, place and essential character of the expense, plus a written statement of business purpose unless it is clear from the circumstances, recorded at or near the time.

The purpose is usually your note, not the receipt. Put it in the books next to the image, so each expense links to its proof. Not every expense is held to the same standard, and some small ones have a lighter rule; what each kind needs is in IRS receipt requirements.

How long do I keep the images, and what if I switch or cancel the app?

Keep the images as long as you would keep the paper. Electronic storage systems carry the same retention rules as the original paper (Publication 583), and records must be kept as long as their contents may become material to any internal revenue law (26 CFR 1.6001-1(e)). For most income tax records that is until the window for amending the return, or for the IRS to assess more tax, closes: generally 3 years after filing (a return filed early counts as filed on its due date), and longer in listed cases (IRS: How long should I keep records?). A partnership or S corporation also counts from the date each partner's or shareholder's return is due or filed, whichever is later (Form 1065 instructions; Form 1120-S instructions). Every period is in how long to keep business records.

Property records can be kept as compliant images too, but for longer: until the period closes for the year of a taxable disposition. After a nontaxable exchange, keep the old and the replacement property records until it closes for the year you dispose of the replacement (Publication 583). An image works only if it is still retrievable then.

Cancelling an app can leave the records treated as destroyed. If you stop maintaining the hardware and software needed to meet the conditions, the stored records are treated as destroyed unless they remain available to the IRS as the revenue procedure requires (Revenue Procedure 97-22, section 4.01). An app that deletes images when the subscription ends can leave you with neither paper nor images.

Before you cancel or switch:

1. Read the terms. Check what happens to your files at cancellation, what export formats exist and whether any term limits access to them.
2. Export everything. Take every image, the index (or file names that carry it) and the link from each ledger entry to its image.
3. Test the export. Open a sample of files without the app.
4. Store it with your backups for the whole retention period.
5. Then cancel.

For the books themselves, see switching accounting software mid-year and records to keep when cancelling accounting software.

How do I organize and back up scanned records so the IRS or my preparer can get them?

Name each file so it can be found without opening it, tie it to its ledger entry, and keep a second copy outside the app.

• File names. An app that attaches the image to the transaction does this for you. Without one, use a fixed pattern, such as date, vendor and amount.
• Folders. Publication 583 suggests organizing supporting documents by year and by type of income or expense.
• Backups. The revenue procedure names labeling, secure storage, back-up copies, an off-site location and periodic testing as recommended practices, and leaves them to the taxpayer (Revenue Procedure 97-22, section 4.03). With the paper gone, a lost image cannot be replaced, so treat a backup as necessary.
• Preparer access. Give your bookkeeper or preparer a way to open the images and the ledger that does not depend on your login.

What will the IRS ask for if I'm examined and keep my books in software?

Usually the software's backup file, early in the examination, plus the administrator's username and password. The IRS asks for these in an Information Document Request on Form 4564 (its written list of what it wants), and says examiners request the backup file in the majority of cases where books are kept in software (IRS: electronic accounting software records). A narrow audit, such as one expense item, may not call for it. That page describes Small Business/Self-Employed examinations.

The software data is a record too, not only the images. Publication 583 says to keep the machine-sensible records (the software's own data file) and a complete description of the computerized part of your system, and Revenue Procedure 98-25 sets the detail (Publication 583). For a smaller business, that procedure applies when some information the law requires exists only in the software (section 4.02). Where it does not apply, the IRS says that is no exemption from producing electronic books that exist (IRS software records FAQ, Q7).

The revenue procedure has no carve-out for examined years, but records stay material while an examination is open (26 CFR 1.6001-1(e)). Many owners keep the paper for any open or notified year; that is a precaution, not an IRS rule. How an examination runs, and what happens if records are missing, is in an IRS audit of a small business and penalties for not keeping business records.

Do other agencies, lenders or insurers have their own rules about keeping paper?

Yes, they can. The IRS says not to discard records until you check whether you must keep them longer for other purposes, and notes that insurers and creditors may require longer than the IRS does (IRS: How long should I keep records?). This page covers the federal income tax standard. State tax agencies, payroll rules, lenders and insurers each set their own.

California's sales and use tax regulation is one example. It lets a taxpayer under that law convert required records to storage-only images, including PDF files, and discard the paper if conditions are met, and sets a minimum of 4 years unless the state authorizes less in writing (CDTFA Regulation 1698). Other states differ, so check each state where you have a filing. Payroll has its own clocks: see payroll records retention.

Example

All amounts are in US dollars and are illustrative.

A contractor tests, documents and shreds

A contractor photographs every receipt in an app that saves the image with the date and vendor and links it to the bookkeeping entry. One Friday she picks 20 receipts from different months and vendors, finds each one using only the app's search, prints it and compares it with the paper. Each shows the vendor, date and total clearly, for example US$86.40 at a supply store. She writes one page with the date, the sample and the result, adds a note on how she scans, names and backs up files, and sets a monthly spot check. Then she shreds the paper the test covered. This shows the steps, not that her setup meets every requirement. That also depends on the app's controls, its index, and whether its terms limit the IRS's access to the system.

A caterer keeps the faded paper

A caterer's fuel receipts print on thermal paper. The photos of the older ones came out faded: the US$62 total is hard to read and the date is gone. She keeps the paper for those receipts, because the image cannot be read. The clear ones in the same batch pass her test and are shredded.

An LLC owner cancels the receipt app

An LLC owner pays US$30 a month for a receipt app and plans to stop. The app deletes images when the subscription ends. With the paper already shredded, he would have no receipts, and the images could be treated as destroyed. Before cancelling he exports every image with the index and ledger links, opens a sample of the files without the app and stores copies with his other backups. Then he cancels.

Different for you?

• You are about to shred a drawer or boxes of receipts, or already did and cannot tell whether the app's images would hold up: the IRS looks at the system description, the index, the legibility of the images and the link from each expense to its image. Bring those, a few sample scans (include a faded one) and the app's terms to bookkeeping help, before the paper goes if you can.
• The paper is gone and the images are weak or missing: see lost receipts for business expenses. Bring your statements, vendor copies and the app's data to bookkeeping help to see what can be supported.
• Books are behind or receipts are unsorted for a year or more: see catching up on overdue books and get bookkeeping help.
• A bookkeeper, partner or staff member scans for the business, or the app account is in someone else's name: get bookkeeping help to set up one system, one test record and one backup the business owns.
• The IRS sent a letter or opened an examination: see an IRS notice to your business and an IRS audit of a small business.
• You are closing the business or changing software: see records to keep when cancelling accounting software.
• You also have a Canadian business, or receipts in another currency: see expenses paid in foreign currency and scanned receipts for the CRA.
• You want a simple year-round routine, or are choosing an app: see record keeping for the self-employed and a bookkeeping app for Schedule C.