I've been involved in the tax return preparation process for 30 years. During those years, I've come across many myths that people believe about tax preparation.
Today, I'll share the top myths I hear about tax return preparation and why they are not true.
Myth #1: A Refund is Great News
You've probably heard some tax preparation firms brag about how many of their customers receive refunds, or the average size of their customers' refunds.
Isn't this great news? I'm not so sure it is.
A refund can seem like great news, especially if it isn't expected, but it usually indicates a lack of tax planning. With proper planning, that refund can be received a whole lot earlier. While most people don't want to owe tax when they file their return, they also don't like to part with their money any earlier than they have to and that is exactly what a refund reflects.
Myth #2: Filing an Extension is Bad
Many taxpayers are hesitant to file extensions for their business or personal tax returns for fear that there are hidden disadvantages to doing so. This is not true. In fact, extending your tax return can be a great tool in your tax strategy.
Extensions are helpful to avoid having to file amended returns. Sometimes the forms or information you receive from others to complete your tax return may be amended. If you receive an amended form and you've already filed your return, then you must amend your tax return.
Other times, the information you need from others to complete your tax return may be late. Filing an extension provides you with the time to gather this information and accurately report it on your tax return.
Remember: An extension does not mean you are off the hook when it comes to gathering your tax information timely. It is still important to gather all of your tax information timely so the extension can be prepared with the best information available.
Also, an extension does not extend the due date of any taxes due with the return. Any tax liability due with the return is due on the original due date.
Myth #3: Tax Return Preparation is a Cash Outflow
Tax return preparation fees can vary dramatically. This makes it extremely important to look at the big picture rather than just the cash outflow.
Let me give you an example. Suppose you have a choice of paying $500 for your tax return to be prepared or $2,000. All things being equal, anyone would choose to pay the lesser amount.
But, what if all things are not equal? What if the $500 gets you an adequate, accurate return but the $2,000 would get you a return where you legally pay $5,000 less in tax? Which is the better deal? In one, you are out $500. In the other, you are ahead a net of $3,000.
Before you have your next tax return prepared, review your own tax situation and the advice you are receiving from your tax advisor. Are you getting the return on investment you want? Are you getting the planning ideas you need? Are your taxes going down or do they continue to increase?
Myth #4: Accurate Returns Are All The Same
In all the firms and companies at which I have worked, the basic accuracy of tax return preparation was excellent. I find this also to be the case on returns that I see from clients who are new to ProVision. It's rare that I find a flagrant error in a return.
But, does that mean that these firms all produce the same quality of tax return? The clear answer in my experience is a resounding “NO!”
Accuracy in a tax return simply means that the information provided by the client was reflected on the tax return. It does not mean that the tax return was prepared in the best way it could have been prepared. In fact, I rarely see a tax return from a new client that was prepared the way we would prepare it at ProVision.
For example, certain deductions can be classified in different ways. While each way is technically accurate, the tax impact of each can vary dramatically.
It's not safe to assume your tax preparer (or tax software) knows the difference.
Never use a tax preparer who isn't also your tax advisor. You may otherwise get great advice that is never used and lose out on great tax savings.
Myth #5: The Software Does All The Work
Whether you do your tax return yourself or hire someone to prepare it, most likely there is tax software involved. Many people make the assumption that the tax software does all the work.
While the tax software performs the calculations (usually quite accurately), it's easy to get into trouble if the input is incorrect.
The true work and expertise – and resulting tax savings – is in the knowledge of the tax preparer.