HRB-27 Final Exam Review
What does it mean if a proprietor "materially participates" in the business? - CORRECT
ANSWER-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 ANSWER-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 ANSWER-• 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 ANSWER-Beginning inventory plus
purchases, plus labor, supplies, depreciation, etc. attributable to product manufacture or
preparation for sale, minus ending inventory. (15.7)
What income reporting form should an independent contractor sometimes receive from
the person who paid him for his services? - CORRECT ANSWER-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 ANSWER-• 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)
If the client has contract labor, what should you remind the client that they should do? -
CORRECT ANSWER-• 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 ANSWER-To pay social
security and medicare taxes. (15.14)
What amounts does a proprietor have "at risk"? - CORRECT ANSWER-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 ANSWER-
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
ANSWER-• 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 ANSWER-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 ANSWER-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 ANSWER-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 ANSWER-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 ANSWER-• 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 ANSWER-A Tax Professional must advise the
client of the noncompliance and the consequences for not correcting the situation.
(26.7)
What action should a Tax Professional take if a client insists on reporting information
that is inaccurate? - CORRECT ANSWER-A Tax Professional should never prepare a
return that contains inaccurate information. (26.7)
What does it mean if a proprietor "materially participates" in the business? - CORRECT
ANSWER-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 ANSWER-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 ANSWER-• 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 ANSWER-Beginning inventory plus
purchases, plus labor, supplies, depreciation, etc. attributable to product manufacture or
preparation for sale, minus ending inventory. (15.7)
What income reporting form should an independent contractor sometimes receive from
the person who paid him for his services? - CORRECT ANSWER-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 ANSWER-• 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)
If the client has contract labor, what should you remind the client that they should do? -
CORRECT ANSWER-• 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 ANSWER-To pay social
security and medicare taxes. (15.14)
What amounts does a proprietor have "at risk"? - CORRECT ANSWER-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 ANSWER-
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
ANSWER-• 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 ANSWER-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 ANSWER-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 ANSWER-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 ANSWER-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 ANSWER-• 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 ANSWER-A Tax Professional must advise the
client of the noncompliance and the consequences for not correcting the situation.
(26.7)
What action should a Tax Professional take if a client insists on reporting information
that is inaccurate? - CORRECT ANSWER-A Tax Professional should never prepare a
return that contains inaccurate information. (26.7)
