TAX PREPARER FINAL EXAM REVIEW 2026
QUESTIONS AND ANSWERS 100% PASS
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)
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)
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)
Why is it important to know whether or not the proprietor materially
participates? - 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? - 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? - 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? - 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? - ANSWER- To pay social
security and medicare taxes. (15.14)
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)
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)
,How does a Tax Professional meet due diligence requirements? - 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? - 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? - 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? - 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? - 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? - 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? - 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? - 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? -
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? - ANSWER- • In
the left- hand margin at the top of page 2 of Forms 1040 and 1040A.
•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]
What is the exemption amount for 2009? - ANSWER- $3,650 with a
reduction for higher-income taxpayers of 2% for each $2,500 ($1,250
MFS) the AGI exceeds amounts:
$166,800 S
$250,200 MFJ QW
$125,100 MFS
$208,500
HH (3.7,8)
Are early distributions from qualified retirement plans always penalized? -
ANSWER- No.
•Does not apply to qualified disaster recovery assistance distributions.
•Does not apply to any recovery of cost or any amount rolled over in a timely
manner.
(22.12,13)
How does a Tax Professional know if a distribution exception applies? -
ANSWER- • He can determine that by using thorough interview questions
when discussing the distribution with the client.
•The distribution code on the 1099-R can also be helpful to the Tax
Professional. (22.12)
Is there a time limit for filing amended returns? - ANSWER- Yes.
Three years from the date the return was filed or within two years the tax
was paid, whichever is later. (23.3)
A taxpayer wants to amend his 2006 return. He filed it April 16, 2007. The
return was examined by the IRS on January 9, 2009 and $280 additional tax
was paid that date. What is the latest date on which an amended return may
be filed? - ANSWER- January 9, 2011
Any refund will be limited to $280 (the tax paid within the two years
preceding the date the amended return was filed). (23.3)
What are the rules for changing filing status after the due date of the return?
-
ANSWER- Married couples may not change their filing status from MFJ to MFS
after the due date. (23.4)
QUESTIONS AND ANSWERS 100% PASS
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)
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)
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)
Why is it important to know whether or not the proprietor materially
participates? - 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? - 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? - 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? - 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? - ANSWER- To pay social
security and medicare taxes. (15.14)
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)
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)
,How does a Tax Professional meet due diligence requirements? - 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? - 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? - 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? - 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? - 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? - 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? - 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? - 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? -
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? - ANSWER- • In
the left- hand margin at the top of page 2 of Forms 1040 and 1040A.
•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]
What is the exemption amount for 2009? - ANSWER- $3,650 with a
reduction for higher-income taxpayers of 2% for each $2,500 ($1,250
MFS) the AGI exceeds amounts:
$166,800 S
$250,200 MFJ QW
$125,100 MFS
$208,500
HH (3.7,8)
Are early distributions from qualified retirement plans always penalized? -
ANSWER- No.
•Does not apply to qualified disaster recovery assistance distributions.
•Does not apply to any recovery of cost or any amount rolled over in a timely
manner.
(22.12,13)
How does a Tax Professional know if a distribution exception applies? -
ANSWER- • He can determine that by using thorough interview questions
when discussing the distribution with the client.
•The distribution code on the 1099-R can also be helpful to the Tax
Professional. (22.12)
Is there a time limit for filing amended returns? - ANSWER- Yes.
Three years from the date the return was filed or within two years the tax
was paid, whichever is later. (23.3)
A taxpayer wants to amend his 2006 return. He filed it April 16, 2007. The
return was examined by the IRS on January 9, 2009 and $280 additional tax
was paid that date. What is the latest date on which an amended return may
be filed? - ANSWER- January 9, 2011
Any refund will be limited to $280 (the tax paid within the two years
preceding the date the amended return was filed). (23.3)
What are the rules for changing filing status after the due date of the return?
-
ANSWER- Married couples may not change their filing status from MFJ to MFS
after the due date. (23.4)
