Tax Preparer Final Exam Review
Questions And Answers With Verified
Solutions Newly Updated 2025
1. Income Reporting Form for Independent Contractors
o ANSWER: Independent contractors generally receive Form 1099-
MISC from the person or business that paid them for services.
2. Cash vs. Accrual Method of Accounting
o ANSWER:
Accrual Method: Income is recorded when earned and
expenses when incurred, regardless of whether payment is
made or received in the same year.
Cash Method: Income and expenses are only recorded when
cash is actually received or paid.
3. Material Participation by a Proprietor
o ANSWER: A proprietor “materially participates” if they are actively
and substantially involved in the day-to-day operations of the
business.
4. Why Material Participation is Important
o ANSWER: If a proprietor does not materially participate, losses from
the business are considered passive losses, which can only be
deducted against other passive income, not active income.
5. Returns and Allowances
, o ANSWER: Returns and allowances are amounts refunded to
customers for returned goods, and these amounts are subtracted from
gross receipts when calculating income.
6. Determining Cost of Goods Sold
o ANSWER: Cost of goods sold is calculated as:
Beginning inventory + Purchases + Costs related to production
(e.g., labor, supplies, depreciation) - Ending inventory.
7. Contract Labor and 1099-MISC
o ANSWER: Clients should provide Form 1099-MISC to independent
contractors who earned $600 or more during the tax year.
8. Purpose of Self-Employment Tax
o ANSWER: Self-employment tax is used to pay for Social Security
and Medicare contributions.
9. Proprietor’s "At Risk" Amounts
o ANSWER: A proprietor’s "at risk" amounts include money invested
in the business and any business debt for which they are personally
liable.
10.Effect of Being "At Risk"
ANSWER: Only amounts a proprietor is personally “at risk” for can be used
to calculate the loss on Schedule C for tax purposes.
11.Tax Professional’s Due Diligence Requirements
, ANSWER: Tax professionals must make every effort to prepare accurate
returns by understanding tax law and verifying client-provided information
through reasonability checks.
12.What Is a Thorough Interview
ANSWER: A thorough interview involves asking both general questions
and follow-up questions if any information seems incomplete, inaccurate, or
inconsistent, ensuring all relevant facts are gathered.
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
Questions And Answers With Verified
Solutions Newly Updated 2025
1. Income Reporting Form for Independent Contractors
o ANSWER: Independent contractors generally receive Form 1099-
MISC from the person or business that paid them for services.
2. Cash vs. Accrual Method of Accounting
o ANSWER:
Accrual Method: Income is recorded when earned and
expenses when incurred, regardless of whether payment is
made or received in the same year.
Cash Method: Income and expenses are only recorded when
cash is actually received or paid.
3. Material Participation by a Proprietor
o ANSWER: A proprietor “materially participates” if they are actively
and substantially involved in the day-to-day operations of the
business.
4. Why Material Participation is Important
o ANSWER: If a proprietor does not materially participate, losses from
the business are considered passive losses, which can only be
deducted against other passive income, not active income.
5. Returns and Allowances
, o ANSWER: Returns and allowances are amounts refunded to
customers for returned goods, and these amounts are subtracted from
gross receipts when calculating income.
6. Determining Cost of Goods Sold
o ANSWER: Cost of goods sold is calculated as:
Beginning inventory + Purchases + Costs related to production
(e.g., labor, supplies, depreciation) - Ending inventory.
7. Contract Labor and 1099-MISC
o ANSWER: Clients should provide Form 1099-MISC to independent
contractors who earned $600 or more during the tax year.
8. Purpose of Self-Employment Tax
o ANSWER: Self-employment tax is used to pay for Social Security
and Medicare contributions.
9. Proprietor’s "At Risk" Amounts
o ANSWER: A proprietor’s "at risk" amounts include money invested
in the business and any business debt for which they are personally
liable.
10.Effect of Being "At Risk"
ANSWER: Only amounts a proprietor is personally “at risk” for can be used
to calculate the loss on Schedule C for tax purposes.
11.Tax Professional’s Due Diligence Requirements
, ANSWER: Tax professionals must make every effort to prepare accurate
returns by understanding tax law and verifying client-provided information
through reasonability checks.
12.What Is a Thorough Interview
ANSWER: A thorough interview involves asking both general questions
and follow-up questions if any information seems incomplete, inaccurate, or
inconsistent, ensuring all relevant facts are gathered.
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
