HRB-27 Final Exam Review
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? -
answerIf 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? - answerBeginning 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? - answerTo pay social security and
medicare taxes. (15.14)
What amounts does a proprietor have "at risk"? - answerAmounts 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? - answerOnly 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? - answerA 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? - answerA 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? - answerA 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? - answerAny 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? - answerA 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? - answerA 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.
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? -
answerIf 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? - answerBeginning 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? - answerTo pay social security and
medicare taxes. (15.14)
What amounts does a proprietor have "at risk"? - answerAmounts 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? - answerOnly 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? - answerA 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? - answerA 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? - answerA 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? - answerAny 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? - answerA 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? - answerA 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.
