Should I Save My Tax Records for 7 Years?

There is a widespread rumor that family child care providers should save their tax records for seven years. I've heard this at workshops I conduct across the country.

But, it's not true.

The general rule is that you should keep your tax records for three years - not seven years!

See IRS Publication 583 Starting a Business and Keeping Records (page 15) where it clearly states this three-year rule.

Exceptions

There are several exceptions to this general rule:

If you under-reported your business income by more than 25%, save your records for six years.

If you amend your tax return, save your records for three years after filing your amended return.

If you hire employees, keep your employment tax records (payment history, work records, Form 940, Form 941, W-2 and W-3) for at least four years.

Keep your receipts for items you are depreciating for the life of the depreciation, plus three years. For example, you should depreciate a home improvement (new deck, remodeled kitchen, furnace, etc.) over 39 years. Therefore, you should save receipts for a refrigerator you purchased in 2020 for 39 years years, plus three years, or until April 2089!

After you go out of business you need only save your records of items you are depreciating (and all other items) for three years after your business ends.

If you file a six month extension when doing your taxes (until October 15th), you must save your tax records until three years after October 15th.

State Taxes

Check with your state department of revenue to see if you must save records for your state tax return for longer than three years. For example, if your state requires you to save your records for four years, make sure you save all your federal tax records for four years.

If you commit fraud or don't file your tax return, the IRS can audit you back an indefinite number of years. Therefore, if you are cheating, save your records forever!

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.nerdwallet.com/article/taxes/how-long-to-keep-tax-records

For more information about keeping records, see my book Family Child Care Record Keeping Guide.