Tax Preparer Final Exam Review Questions and Answers
1. What income reporting form should an independent contractor sometimes
receive from the person who paid him for his services? ANSWER Form 1099-
MISC (15.6)
2. 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? 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)
3. What does it mean if a proprietor "materially participates" in the business?
ANSWER He is active in running the business in a substantial way on a day-to-day basis. (15.5)
4. Why is it important to know whether or not the proprietor materially partici-
pates? 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)
5. What are returns and allowances? ANSWER • Amounts that were refunded to customers who
returned merchandise for refund or partial refund.
• These amounts are subtracted from gross receipts. (15.6)
6. How is cost of goods sold determined? ANSWER Beginning inventory plus purchases, plus
labor, supplies, depreciation, etc. attributable to product manufacture or preparation for sale, minus ending
inventory. (15.7)
7. If the client has contract labor, what should you remind the client that they
should do? ANSWER • Provide a Form 1099-MISC to any independent contractor who worked and earned
$600 or more. (15.9)
8. What is the purpose of self-employment tax? ANSWER To pay social security and
medicare taxes. (15.14)
9. What amounts does a proprietor have "at risk"? ANSWER Amounts invested in the
business plus any business debts for which the proprietor is personally liable. (15.16)
10. What difference does it make if the proprietor is "at risk" or not? ANSWER Only
amounts at risk may be used to determine the actual loss on Schedule C. (15.16)
11. How does a Tax Professional meet due diligence requirements? ANSWER • Tax
Professionals fulfill due diligence requirements by making every ettort 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)
,Tax Preparer Final Exam Review Questions and Answers
12. What is a thorough interview? ANSWER A thorough interview consists of asking general
information ques- tions, then asking additional questions whenever information is incomplete or seems inaccurate
or inconsistent. (26.2)
, Tax Preparer Final Exam Review Questions and Answers
13. What is a conflict of interest? ANSWER A conflict of interest is when one's situation might benefit at
the expense of another's situation. (26.3)
14. What actions can resolve a conflict of interest? 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)
15. What client information is confidential? ANSWER Any information that could potentially identify
the client is confidential.
Information includes (but is not limited to) ANSWER
• Name
• Address and phone number
• Social security numbers
• Place of employment
• Any information from a tax return (26.4)
16. Is it acceptable for a Tax Professional to leave a detailed phone message for
a client, letting them know their tax return is complete? 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)
17. What is a Tax Professional's responsibility upon finding out that a client has
not complied with any tax law? ANSWER A Tax Professional must advise the client of the noncompliance
and the consequences for not correcting the situation. (26.7)
18. What action should a Tax Professional take if a client insists on reporting in-
formation that is inaccurate? ANSWER A Tax Professional should never prepare a return that contains
inaccurate information. (26.7)
19. If the employee thinks his Form W-2 is not correct, what should he do?
ANSWER • If the name or social security number is incorrect, the taxpayer may change it 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)
20. Where can the regular standard deduction amounts be found? ANSWER • In
the left-hand margin at the top of page 2 of Forms 1040 and 1040A.
• They are ANSWER S, MFS $5,700; MFJ, QW $11,400; HH $8,400.
1. What income reporting form should an independent contractor sometimes
receive from the person who paid him for his services? ANSWER Form 1099-
MISC (15.6)
2. 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? 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)
3. What does it mean if a proprietor "materially participates" in the business?
ANSWER He is active in running the business in a substantial way on a day-to-day basis. (15.5)
4. Why is it important to know whether or not the proprietor materially partici-
pates? 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)
5. What are returns and allowances? ANSWER • Amounts that were refunded to customers who
returned merchandise for refund or partial refund.
• These amounts are subtracted from gross receipts. (15.6)
6. How is cost of goods sold determined? ANSWER Beginning inventory plus purchases, plus
labor, supplies, depreciation, etc. attributable to product manufacture or preparation for sale, minus ending
inventory. (15.7)
7. If the client has contract labor, what should you remind the client that they
should do? ANSWER • Provide a Form 1099-MISC to any independent contractor who worked and earned
$600 or more. (15.9)
8. What is the purpose of self-employment tax? ANSWER To pay social security and
medicare taxes. (15.14)
9. What amounts does a proprietor have "at risk"? ANSWER Amounts invested in the
business plus any business debts for which the proprietor is personally liable. (15.16)
10. What difference does it make if the proprietor is "at risk" or not? ANSWER Only
amounts at risk may be used to determine the actual loss on Schedule C. (15.16)
11. How does a Tax Professional meet due diligence requirements? ANSWER • Tax
Professionals fulfill due diligence requirements by making every ettort 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)
,Tax Preparer Final Exam Review Questions and Answers
12. What is a thorough interview? ANSWER A thorough interview consists of asking general
information ques- tions, then asking additional questions whenever information is incomplete or seems inaccurate
or inconsistent. (26.2)
, Tax Preparer Final Exam Review Questions and Answers
13. What is a conflict of interest? ANSWER A conflict of interest is when one's situation might benefit at
the expense of another's situation. (26.3)
14. What actions can resolve a conflict of interest? 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)
15. What client information is confidential? ANSWER Any information that could potentially identify
the client is confidential.
Information includes (but is not limited to) ANSWER
• Name
• Address and phone number
• Social security numbers
• Place of employment
• Any information from a tax return (26.4)
16. Is it acceptable for a Tax Professional to leave a detailed phone message for
a client, letting them know their tax return is complete? 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)
17. What is a Tax Professional's responsibility upon finding out that a client has
not complied with any tax law? ANSWER A Tax Professional must advise the client of the noncompliance
and the consequences for not correcting the situation. (26.7)
18. What action should a Tax Professional take if a client insists on reporting in-
formation that is inaccurate? ANSWER A Tax Professional should never prepare a return that contains
inaccurate information. (26.7)
19. If the employee thinks his Form W-2 is not correct, what should he do?
ANSWER • If the name or social security number is incorrect, the taxpayer may change it 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)
20. Where can the regular standard deduction amounts be found? ANSWER • In
the left-hand margin at the top of page 2 of Forms 1040 and 1040A.
• They are ANSWER S, MFS $5,700; MFJ, QW $11,400; HH $8,400.
