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In the last few years, I've seen a significant increase in people taking advantage of online banking services such as bill pay and paperless statements. Most banks offer these services, and some even entice you with a discount if you sign up. While there are some great advantages to implementing these two strategies, I want to make you aware of some of the downfalls that can affect you at tax time and throughout the year.
The most obvious issue is that if you need your information, you are reliant on your computer and the banks computers to be up and running at the same time. Banking websites frequently shut down for maintenance periods during which you can't access your accounts, and we all know that our personal computers can give us trouble at the worst times. Another downside is that many banks only make statements and copies of checks available on the internet for a period of three to six months. After the time expires, customers must pay a fee to obtain copies of their own records. I've seen the fee as high as $3 per check and $25 per monthly statement, so you can imagine the potential cost.
If you have weighed these pros and cons and decide to proceed with online banking, I want to offer a few words of advice based on my experience as a tax preparer. First, you should either print or save electronic copies of your statement each month. If you choose the latter option, don't forget to backup your computer on a regular basis. Second, you must still keep a check register or use a checkbook with a carbon copy option. Most bank statements only show the date, check number and amount, not the payee, so you still have no evidence of who checks were made payable to.
Why do you need such details? Business owners are often reminded of the need to keep good records, but individual taxpayers are not asked for records nearly as often. Unfortunately, the times when individuals need to produce records are often many years following significant events, and therefore they find themselves unable to take advantage of their full tax deductions. The IRS is able to audit tax returns up to seven years after they are filed, and bank statements are one of the first things they request. In addition, if you face capital gains at the time you sell a stock, mutual fund, residence or rental home, you may be asked to prove the cost of your investment made in that asset. Bank statements and checks are commonly called upon to determine your cost basis, and without those critical documents, you may be forced to forgo a perfectly valid deduction. By taking some precautious, you can enjoy the benefits of online banking without finding yourself scrounging for documents in your time of need.
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. Please visit www.cpamichele.com for tax tricks & tips, including a blog to keep you up to date on the ever-changing tax world. Always remember, this advice is not all-inclusive, and you should consult with your tax advisor regarding your personal situation.
The most obvious issue is that if you need your information, you are reliant on your computer and the banks computers to be up and running at the same time. Banking websites frequently shut down for maintenance periods during which you can't access your accounts, and we all know that our personal computers can give us trouble at the worst times. Another downside is that many banks only make statements and copies of checks available on the internet for a period of three to six months. After the time expires, customers must pay a fee to obtain copies of their own records. I've seen the fee as high as $3 per check and $25 per monthly statement, so you can imagine the potential cost.
If you have weighed these pros and cons and decide to proceed with online banking, I want to offer a few words of advice based on my experience as a tax preparer. First, you should either print or save electronic copies of your statement each month. If you choose the latter option, don't forget to backup your computer on a regular basis. Second, you must still keep a check register or use a checkbook with a carbon copy option. Most bank statements only show the date, check number and amount, not the payee, so you still have no evidence of who checks were made payable to.
Why do you need such details? Business owners are often reminded of the need to keep good records, but individual taxpayers are not asked for records nearly as often. Unfortunately, the times when individuals need to produce records are often many years following significant events, and therefore they find themselves unable to take advantage of their full tax deductions. The IRS is able to audit tax returns up to seven years after they are filed, and bank statements are one of the first things they request. In addition, if you face capital gains at the time you sell a stock, mutual fund, residence or rental home, you may be asked to prove the cost of your investment made in that asset. Bank statements and checks are commonly called upon to determine your cost basis, and without those critical documents, you may be forced to forgo a perfectly valid deduction. By taking some precautious, you can enjoy the benefits of online banking without finding yourself scrounging for documents in your time of need.
Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. Please visit www.cpamichele.com for tax tricks & tips, including a blog to keep you up to date on the ever-changing tax world. Always remember, this advice is not all-inclusive, and you should consult with your tax advisor regarding your personal situation.
