TAX PREPARER FINAL EXAM REVIEW
QUESTIONS AND ANSWERS
What income reporting form should an independent contractor sometimes receive from
the person who paid him for his services? - Correct Answers -Form 1099-MISC (15.6)
Schedule C, Line F asks for the accounting method used in the business.
What is the difference between the cash method and the accrual method of accounting?
- Correct Answers -• Under the accrual method, total sales and total charges for
services are included in income even though payment may be received in another tax
year.
• Under the cash method, only income actually received or expenses actually paid
during the year are included. (15.5)
What does it mean if a proprietor "materially participates" in the business? - Correct
Answers -He is active in running the business in a substantial way on a day-to-day
basis. (15.5)
Why is it important to know whether or not the proprietor materially participates? -
Correct Answers -If the proprietor does not materially participate, any loss from the
business is a passive loss and generally may be currently deducted only against
passive income. (15.6)
What are returns and allowances? - Correct Answers -• Amounts that were refunded to
customers who returned merchandise for refund or partial refund.
• These amounts are subtracted from gross receipts. (15.6)
How is cost of goods sold determined? - Correct Answers -Beginning inventory plus
purchases, plus labor, supplies, depreciation, etc. attributable to product manufacture or
preparation for sale, minus ending inventory. (15.7)
If the client has contract labor, what should you remind the client that they should do? -
Correct Answers -• Provide a Form 1099-MISC to any independent contractor who
worked and earned $600 or more. (15.9)
What is the purpose of self-employment tax? - Correct Answers -To pay social security
and medicare taxes. (15.14)
, What amounts does a proprietor have "at risk"? - Correct Answers -Amounts invested in
the business plus any business debts for which the proprietor is personally liable.
(15.16)
What difference does it make if the proprietor is "at risk" or not? - Correct Answers -Only
amounts at risk may be used to determine the actual loss on Schedule C. (15.16)
How does a Tax Professional meet due diligence requirements? - Correct Answers -•
Tax Professionals fulfill due diligence requirements by making every effort to prepare
accurate and complete returns.
• Tax Professionals must have knowledge of tax law, and apply a reasonability check to
the information provided by their clients. (26.1)
What is a thorough interview? - Correct Answers -A thorough interview consists of
asking general information questions, then asking additional questions whenever
information is incomplete or seems inaccurate or inconsistent. (26.2)
What is a conflict of interest? - Correct Answers -A conflict of interest is when one's
situation might benefit at the expense of another's situation. (26.3)
What actions can resolve a conflict of interest? - Correct Answers -A conflict of interest
is resolved when it is acknowledged, disclosed to all parties, and the parties have
consented to waiving the conflict. (26.3)
What client information is confidential? - Correct Answers -Any information that could
potentially identify the client is confidential.
Information includes (but is not limited to):
• Name
• Address and phone number
• Social security numbers
• Place of employment
• Any information from a tax return (26.4)
Is it acceptable for a Tax Professional to leave a detailed phone message for a client,
letting them know their tax return is complete? - Correct Answers -• Tax Professionals
must have prior consent from the client to leave phone messages related to their tax
return.
• The fact that a taxpayer is the client of a Tax Professional or tax preparation business
is confidential information that must not be disclosed. (26.5)
What is a Tax Professional's responsibility upon finding out that a client has not
complied with any tax law? - Correct Answers -A Tax Professional must advise the
client of the noncompliance and the consequences for not correcting the situation.
(26.7)
QUESTIONS AND ANSWERS
What income reporting form should an independent contractor sometimes receive from
the person who paid him for his services? - Correct Answers -Form 1099-MISC (15.6)
Schedule C, Line F asks for the accounting method used in the business.
What is the difference between the cash method and the accrual method of accounting?
- Correct Answers -• Under the accrual method, total sales and total charges for
services are included in income even though payment may be received in another tax
year.
• Under the cash method, only income actually received or expenses actually paid
during the year are included. (15.5)
What does it mean if a proprietor "materially participates" in the business? - Correct
Answers -He is active in running the business in a substantial way on a day-to-day
basis. (15.5)
Why is it important to know whether or not the proprietor materially participates? -
Correct Answers -If the proprietor does not materially participate, any loss from the
business is a passive loss and generally may be currently deducted only against
passive income. (15.6)
What are returns and allowances? - Correct Answers -• Amounts that were refunded to
customers who returned merchandise for refund or partial refund.
• These amounts are subtracted from gross receipts. (15.6)
How is cost of goods sold determined? - Correct Answers -Beginning inventory plus
purchases, plus labor, supplies, depreciation, etc. attributable to product manufacture or
preparation for sale, minus ending inventory. (15.7)
If the client has contract labor, what should you remind the client that they should do? -
Correct Answers -• Provide a Form 1099-MISC to any independent contractor who
worked and earned $600 or more. (15.9)
What is the purpose of self-employment tax? - Correct Answers -To pay social security
and medicare taxes. (15.14)
, What amounts does a proprietor have "at risk"? - Correct Answers -Amounts invested in
the business plus any business debts for which the proprietor is personally liable.
(15.16)
What difference does it make if the proprietor is "at risk" or not? - Correct Answers -Only
amounts at risk may be used to determine the actual loss on Schedule C. (15.16)
How does a Tax Professional meet due diligence requirements? - Correct Answers -•
Tax Professionals fulfill due diligence requirements by making every effort to prepare
accurate and complete returns.
• Tax Professionals must have knowledge of tax law, and apply a reasonability check to
the information provided by their clients. (26.1)
What is a thorough interview? - Correct Answers -A thorough interview consists of
asking general information questions, then asking additional questions whenever
information is incomplete or seems inaccurate or inconsistent. (26.2)
What is a conflict of interest? - Correct Answers -A conflict of interest is when one's
situation might benefit at the expense of another's situation. (26.3)
What actions can resolve a conflict of interest? - Correct Answers -A conflict of interest
is resolved when it is acknowledged, disclosed to all parties, and the parties have
consented to waiving the conflict. (26.3)
What client information is confidential? - Correct Answers -Any information that could
potentially identify the client is confidential.
Information includes (but is not limited to):
• Name
• Address and phone number
• Social security numbers
• Place of employment
• Any information from a tax return (26.4)
Is it acceptable for a Tax Professional to leave a detailed phone message for a client,
letting them know their tax return is complete? - Correct Answers -• Tax Professionals
must have prior consent from the client to leave phone messages related to their tax
return.
• The fact that a taxpayer is the client of a Tax Professional or tax preparation business
is confidential information that must not be disclosed. (26.5)
What is a Tax Professional's responsibility upon finding out that a client has not
complied with any tax law? - Correct Answers -A Tax Professional must advise the
client of the noncompliance and the consequences for not correcting the situation.
(26.7)
