Common HSA Receipt Mistakes (And How to Avoid Them)
Don't let simple documentation errors cost you thousands in IRS penalties. Learn the most common HSA receipt mistakes and how to maintain audit-proof records.
The Stakes Are High
If you can't prove HSA expenses were qualified during an IRS audit, you'll face 20% penalty + income tax on ineligible amounts. The IRS can audit up to 7 years back, making proper documentation critical.
The 7 Most Common Mistakes
1. Not Saving Receipts at All
CRITICALThe Mistake:
Relying on credit card statements or HSA provider records instead of actual receipts. While your HSA administrator doesn't require receipts for withdrawals, the IRS does during an audit.
The Consequence:
Without receipts, you can't prove expenses were qualified medical expenses. The IRS will deem them ineligible, triggering 20% penalty + taxes.
How to Avoid:
- • Save every receipt for HSA-paid expenses
- • Photograph receipts immediately (thermal ink fades fast)
- • Use HSA Vault to automatically organize and backup receipts
- • Keep both digital AND physical copies for redundancy
2. Missing Required Receipt Information
CRITICALThe Mistake:
Keeping receipts that lack essential information like patient name, provider, date of service, or service description. Generic receipts like "medical services - $200" aren't sufficient.
IRS Requirements:
Must Include:
- ✓ Patient name
- ✓ Provider name
- ✓ Date of service
- ✓ Service description
- ✓ Amount paid
Helpful to Include:
- • CPT codes
- • Insurance EOB
- • Diagnosis codes
- • Payment method
How to Avoid:
- • Always request itemized receipts from providers
- • Verify receipts have all 5 required elements before leaving
- • Ask for EOB from insurance company for additional documentation
- • Use AI tools to verify receipt completeness automatically
3. Relying on Fading Thermal Receipts
The Mistake:
Most retail receipts (pharmacies, stores) use thermal paper that fades to blank within 6-12 months, especially when exposed to heat or sunlight.
How to Avoid:
- • Photograph or scan receipts immediately (same day)
- • Store physical receipts in dark, cool, dry location
- • Never laminate or tape thermal receipts (accelerates fading)
- • Use apps that auto-backup to cloud storage
4. Not Tracking Out-of-Pocket Expenses
The Mistake:
Only saving receipts for expenses paid with HSA funds, ignoring medical expenses paid with regular income or credit cards.
The Opportunity:
You can reimburse yourself from your HSA at any time in the future—there's no deadline! Save receipts for out-of-pocket expenses now, reimburse yourself tax-free years later.
How to Avoid:
- • Track all qualified medical expenses, regardless of payment method
- • Mark receipts as "pending reimbursement" vs. "reimbursed"
- • Keep a running total of unreimbursed expenses
- • Use expense tracking software to monitor both
5. Mixing Eligible and Ineligible Purchases
The Mistake:
Buying HSA-eligible items (pain relievers, bandages) and non-eligible items (shampoo, snacks) in one transaction, then using your HSA card for the entire purchase.
The Consequence:
If audited, you must prove which items were eligible. Without itemization, the IRS may disallow the entire expense.
How to Avoid:
- • Separate transactions: Pay for eligible and non-eligible items separately
- • Request itemized receipt showing each item and price
- • Use HSA card only for 100% eligible purchases
- • If mixed, pay with regular card and reimburse only eligible portions
6. Not Keeping Records Long Enough
The Mistake:
Discarding receipts after 1-2 years or once taxes are filed for that year.
IRS Audit Period:
The IRS statute of limitations is typically 3 years, but they recommend keeping medical expense records for 7 years. HSA administrators may also request documentation years later.
How to Avoid:
- • Keep HSA receipts for at least 7 years
- • Organize by year for easy access during audits
- • Use cloud storage with automatic backup for permanent retention
- • Set calendar reminders to archive old receipts (don't delete)
7. Missing Letter of Medical Necessity (LMN)
The Mistake:
Using HSA funds for items that require an LMN (like weight-loss programs, gym memberships, compression socks) without getting one from your doctor.
When LMN is Required:
Common items needing LMN:
- • Weight-loss programs (for diagnosed obesity)
- • Gym memberships (for specific medical condition)
- • Massage therapy (for diagnosed condition)
- • Orthopedic shoes/inserts
- • Compression hosiery
- • Home improvements (wheelchair ramps, etc.)
How to Avoid:
- • Check HSA eligible expenses list before making purchases
- • Get LMN from doctor BEFORE using HSA funds
- • LMN must state: diagnosis, why item is medically necessary, how it treats condition
- • Keep LMN with receipt permanently
Best Practices for Audit-Proof Documentation
Immediate capture: Photograph receipts the moment you receive them
Triple backup: Physical copy + digital scan + cloud storage
Weekly processing: Don't wait until year-end; process receipts every week
AI automation: Use HSA Vault to automatically extract receipt data and verify completeness
Verification: Check receipts have all 5 required elements before filing
7-year retention: Keep records for at least 7 years, organized by year
Eliminate Receipt Mistakes with Automation
HSA Vault's AI automatically verifies receipt completeness, extracts all required details, and securely stores records for IRS compliance. Never worry about missing information again.