TAX PREPARER FINAL EXAM REVIEW
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)
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)
, 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)
• 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
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)
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)
, 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)
• 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
