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The myths of tax preparation and planning

Wow. Some tax preparers are aggressive. Consider singer Stevie Nicks' tax preparer. In November, 1997, her lawyer told the U.S. Internal Revenue Service (IRS) that the reason she deducted so much clothing for tax purposes was that she had to throw away each outfit after one use because of "the energy levels of her performances and the heat generated on stage from lights and physical exertion."

Consider also Dean Harvey Hicks of Costa Mesa, Calif., who was sentenced to 20 years in prison as a result of his conviction for launching aerial bombs at one IRS building and trying to blow up three others.

Mr. Hicks had become distraught that the IRS had refused to allow him a tax deduction for an $8,000 donation to a mail-order "church."

Aggressive tax preparation is one way to save tax.

But proper tax planning is a better idea. Let me dispel a few myths about tax preparation and planning.

Myth No. 1: Tax preparers are

usually tax planners.

Many Canadians believe that simply taking their tax returns to a tax preparer is going to somehow result in proper tax planning. Not likely.

You see, tax preparation is simply the process of properly filling in your tax forms in accordance with the tax law; it's simply reflecting on your tax return what has already taken place financially for the year.

Tax planning, on the other hand, is the process of identifying specific changes to your life to be made in order to provide greater tax savings, and then implementing those changes.

Now, don't get me wrong. Tax preparers play an important role for many Canadians. But don't confuse your tax preparer for a tax planner if that's not what he or she is. A tax planner generally has some professional designation, such as a CA, CGA, CMA or CFP, among others. Most tax preparers are not tax planners at all.

Myth No. 2: An experienced tax

preparer matters most.

Hogwash. I've met experienced tax preparers who have been preparing tax returns incorrectly for years. When the tax preparer is dealing primarily with simple (read "low risk") tax returns, he or she may never have a client face an audit -- and so the same mistakes are made year after year.

When tax returns increase in complexity, it's absolutely critical to prepare the tax return properly. Experience alone in tax preparation doesn't equate to a correct tax return. Rather, tax education and continuing training matter most, followed by experience. Don't be afraid to ask your tax preparer what formal tax training they've had. And if he or she is experienced to boot, even better.

Myth No. 3: Bigger refunds

must mean a good preparer.

If you believe the most recent television ads run by H&R Block, you must be kicking yourself for ever having had a chartered accountant prepare your tax return. Now, understand that I'm a CA, so you can imagine what I thought of the ad.

The ad implies that CAs aren't adequately trained in tax, and you may be due for a bigger refund if you visit H&R Block.

The message of the ad would be laughable if it didn't provide such a disservice. You see, the apparent message is this: Reducing your tax burden has everything to do with how you prepare your tax return, and a bigger refund is what really matters.

This is precisely the mindset of Canadians who don't fully understand tax planning.

I wish I had a loonie for every client that I've met who claimed "my tax preparer last year got me a bigger refund than you."

In virtually all of these situations, my response was "I know, but this year we've prepared your tax return. Now, let's sit down and do some proper tax planning to reduce your tax bill for next year."

Myth No. 4: Tax planning should

be done in April.

One of the most common complaints among Canadians is that they feel the tax professionals they work with are not being proactive in saving them tax. The truth is, if you visit your tax professional once each year in April, then of course you're not getting the proactive tax planning you're looking for. Most good tax planners are also tax preparers and they're busy in April preparing returns. It's the wrong time to expect the professional to stop to smell the roses -- or your tax situation. Make an appointment with your tax planner in May or June to establish some tax planning for the future.

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