Tax Preparer Final Exam Review
Question and answers already passed
2025/2026
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)
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)
,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)
If the employee thinks his Form W-2 is not correct, what should he do? - correct 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)
Where can the regular standard deduction amounts be found? - correct answer ✔• In the left-hand
margin at the top of page 2 of Forms 1040 and 1040A.
Question and answers already passed
2025/2026
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)
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)
,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)
If the employee thinks his Form W-2 is not correct, what should he do? - correct 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)
Where can the regular standard deduction amounts be found? - correct answer ✔• In the left-hand
margin at the top of page 2 of Forms 1040 and 1040A.
