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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?
• 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?
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?
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?
• 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?
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?
• 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?
To pay social security and medicare taxes. (15.14)
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,qTax
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Preparer
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What amounts does a proprietor have "at risk"?
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?
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?
• 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?
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?
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?
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)
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,qTax
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What client information is confidential?
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?
• 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?
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?
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?
• 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)
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Tax Preparer Final Exam Review qTax Preparer Final Exam Review q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
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Preparer
9/22/2026Tax
Final Exam
Preparer
Review
Final
q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&########################
Exam Review qTax Preparer Final Exam Review q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~
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?
• 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?
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?
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?
• 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?
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?
• 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?
To pay social security and medicare taxes. (15.14)
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Tax Preparer Final Exam Review qTax Preparer Final Exam Review q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
,qTax
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Preparer
9/22/2026Tax
Final Exam
Preparer
Review
Final
q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&########################
Exam Review qTax Preparer Final Exam Review q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~
What amounts does a proprietor have "at risk"?
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?
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?
• 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?
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?
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?
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)
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Tax Preparer Final Exam Review qTax Preparer Final Exam Review q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
,qTax
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Preparer
9/22/2026Tax
Final Exam
Preparer
Review
Final
q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&&&&&&&&########################
Exam Review qTax Preparer Final Exam Review q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~
What client information is confidential?
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?
• 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?
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?
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?
• 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)
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Tax Preparer Final Exam Review qTax Preparer Final Exam Review q!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
