Tax Preparer Final Exam Review UPDATED ACTUAL
QUESTIONS AND CORRECT Answers
What income reporting form should an independent Form 1099-MISC (15.6)
contractor sometimes receive from the person who
paid him for his services?
Schedule C, Line F asks for the accounting method • Under the accrual method, total sales and total charges for services are
used in the business. included in income even though payment may be received in another tax year.
What is the difference between the cash method and • Under the cash method, only income actually received or expenses actually
the accrual method of accounting? paid during the year are included. (15.5)
What does it mean if a proprietor "materially He is active in running the business in a substantial way on a day-to-day basis.
participates" in the business? (15.5)
Why is it important to know whether or not the If the proprietor does not materially participate, any loss from the business is a
proprietor materially participates? passive loss and generally may be currently deducted only against passive
income. (15.6)
What are returns and allowances? • 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? 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 • Provide a Form 1099-MISC to any independent contractor who worked and
the client that they should do? earned $600 or more. (15.9)
What is the purpose of self-employment tax? To pay social security and medicare taxes. (15.14)
, What amounts does a proprietor have "at risk"? 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" Only amounts at risk may be used to determine the actual loss on Schedule C.
or not? (15.16)
How does a Tax Professional meet due diligence • Tax Professionals fulfill due diligence requirements by making every effort to
requirements? 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? 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? 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? 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? 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 • Tax Professionals must have prior consent from the client to leave phone
detailed phone message for a client, letting them know messages related to their tax return.
their tax return is complete? • 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 A Tax Professional must advise the client of the noncompliance and the
out that a client has not complied with any tax law? consequences for not correcting the situation. (26.7)
What action should a Tax Professional take if a client A Tax Professional should never prepare a return that contains inaccurate
insists on reporting information that is inaccurate? information. (26.7)
If the employee thinks his Form W-2 is not correct, what • If the name or social security number is incorrect, the taxpayer may change it
should he do? himself and need not obtain a corrected W-2 before filing his tax return.
• The employer should be notified of the error and asked to update his records.
• Furthermore, the employee's social security number and earnings records
should be verified with the Social Security Administration to ensure that the
earnings were properly credited. (2.17)
Where can the regular standard deduction amounts be • In the left-hand margin at the top of page 2 of Forms 1040 and 1040A.
found? • They are: S, MFS $5,700; MFJ, QW $11,400; HH $8,400.
• The amounts differ for taxpayers age 65 or older or blind and those who may
be claimed as dependents by other taxpayers.
[2010]
QUESTIONS AND CORRECT Answers
What income reporting form should an independent Form 1099-MISC (15.6)
contractor sometimes receive from the person who
paid him for his services?
Schedule C, Line F asks for the accounting method • Under the accrual method, total sales and total charges for services are
used in the business. included in income even though payment may be received in another tax year.
What is the difference between the cash method and • Under the cash method, only income actually received or expenses actually
the accrual method of accounting? paid during the year are included. (15.5)
What does it mean if a proprietor "materially He is active in running the business in a substantial way on a day-to-day basis.
participates" in the business? (15.5)
Why is it important to know whether or not the If the proprietor does not materially participate, any loss from the business is a
proprietor materially participates? passive loss and generally may be currently deducted only against passive
income. (15.6)
What are returns and allowances? • 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? 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 • Provide a Form 1099-MISC to any independent contractor who worked and
the client that they should do? earned $600 or more. (15.9)
What is the purpose of self-employment tax? To pay social security and medicare taxes. (15.14)
, What amounts does a proprietor have "at risk"? 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" Only amounts at risk may be used to determine the actual loss on Schedule C.
or not? (15.16)
How does a Tax Professional meet due diligence • Tax Professionals fulfill due diligence requirements by making every effort to
requirements? 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? 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? 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? 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? 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 • Tax Professionals must have prior consent from the client to leave phone
detailed phone message for a client, letting them know messages related to their tax return.
their tax return is complete? • 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 A Tax Professional must advise the client of the noncompliance and the
out that a client has not complied with any tax law? consequences for not correcting the situation. (26.7)
What action should a Tax Professional take if a client A Tax Professional should never prepare a return that contains inaccurate
insists on reporting information that is inaccurate? information. (26.7)
If the employee thinks his Form W-2 is not correct, what • If the name or social security number is incorrect, the taxpayer may change it
should he do? himself and need not obtain a corrected W-2 before filing his tax return.
• The employer should be notified of the error and asked to update his records.
• Furthermore, the employee's social security number and earnings records
should be verified with the Social Security Administration to ensure that the
earnings were properly credited. (2.17)
Where can the regular standard deduction amounts be • In the left-hand margin at the top of page 2 of Forms 1040 and 1040A.
found? • They are: S, MFS $5,700; MFJ, QW $11,400; HH $8,400.
• The amounts differ for taxpayers age 65 or older or blind and those who may
be claimed as dependents by other taxpayers.
[2010]
