Tax Preparer Final Exam Review 2026
Questions with verified Answers
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)
Schedule C, Line F asks for the accounting method used in the business.
2. 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 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)
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 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)
12. 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)
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 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)
17. 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)
18. 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)
19. 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)
,20. 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]
21. 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)
22. 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)
23. 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)
24. 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)
25. 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)
26. 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)
27. A taxpayer's employer paid $500 of a taxpayer's $2,000 child care expenses for him. How
will the employer's assistance affect the child-care credit? - ANSWER-Total child care
expenses must be reduced by any amounts paid by the employer. (8.11)
, 28. Where does the employer report the amount of child care expense assistance to the
taxpayer? - ANSWER-Form W-2 Box 10 (8.11)
29. What is the maximum amount of contributions on which the Saver's Credit may be
based? - ANSWER-$2,000 per individual or spouse (21.19)
30. What are the rates for the Saver's Credit? - ANSWER-The rates are 10%, 20%, or 50%,
depending upon filing status and modified AGI. (21.17)
31. A taxpayer is building a new home and had a solar water heater installed in 2009, but the
home was not ready to be occupied until early 2010. Can they take the residential energy
credit? - ANSWER-Yes, they can take the credit on their 2010 tax return. (8.21)
32. How much may an eligible educator deduct for qualified classroom expenses as an
adjustment to income? - ANSWER-Up to $250 (11.4)
33. Who is an eligible educator? - ANSWER-Works at least 900 hours a year. (11.4)
34. Where is the educator expense deduction reported? - ANSWER-Form 1040 Line 23.
35. Who may not claim a student loan interest deduction? - ANSWER-Someone who is
claimed as a dependent may not claim the deduction in the current tax year, nor may
someone who uses the married filing separately filing status.(11.8)
36. What is a qualified student loan? - ANSWER-• Any type of loan used to pay qualified
expenses. Credit card debt may be included, provided the card was used exclusively to
pay for qualified expenses.
• Money borrowed from a related person is not a qualified student loan. (11.5)
37. Where are moving expenses deducted on Form 1040? - ANSWER-Line 26, from Form
3903
38. What are qualified medical expenses with regards to an HSA? - ANSWER-Unreimbursed
medical expenses that would normally be deductible on Schedule A (11.16)
39. What form is used to report HSA contributions and determine any allowable deduction? -
ANSWER-Form 8889. Reported on Form 1040 Line 25.
40. What is a qualified retirement plan? - ANSWER-A plan which is eligible for favorable
tax treatment because it meets the requirements of IRC §401(a) and the Employment
Retirement Income Security Act of 1974 (ERISA) (21.2)
41. What is the 2009 contribution limit to 401(k) plans? - ANSWER-• The maximum
contribution for 2009 is $16,500 (and 2010).
Questions with verified Answers
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)
Schedule C, Line F asks for the accounting method used in the business.
2. 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 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)
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 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)
12. 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)
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 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)
17. 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)
18. 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)
19. 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)
,20. 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]
21. 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)
22. 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)
23. 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)
24. 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)
25. 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)
26. 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)
27. A taxpayer's employer paid $500 of a taxpayer's $2,000 child care expenses for him. How
will the employer's assistance affect the child-care credit? - ANSWER-Total child care
expenses must be reduced by any amounts paid by the employer. (8.11)
, 28. Where does the employer report the amount of child care expense assistance to the
taxpayer? - ANSWER-Form W-2 Box 10 (8.11)
29. What is the maximum amount of contributions on which the Saver's Credit may be
based? - ANSWER-$2,000 per individual or spouse (21.19)
30. What are the rates for the Saver's Credit? - ANSWER-The rates are 10%, 20%, or 50%,
depending upon filing status and modified AGI. (21.17)
31. A taxpayer is building a new home and had a solar water heater installed in 2009, but the
home was not ready to be occupied until early 2010. Can they take the residential energy
credit? - ANSWER-Yes, they can take the credit on their 2010 tax return. (8.21)
32. How much may an eligible educator deduct for qualified classroom expenses as an
adjustment to income? - ANSWER-Up to $250 (11.4)
33. Who is an eligible educator? - ANSWER-Works at least 900 hours a year. (11.4)
34. Where is the educator expense deduction reported? - ANSWER-Form 1040 Line 23.
35. Who may not claim a student loan interest deduction? - ANSWER-Someone who is
claimed as a dependent may not claim the deduction in the current tax year, nor may
someone who uses the married filing separately filing status.(11.8)
36. What is a qualified student loan? - ANSWER-• Any type of loan used to pay qualified
expenses. Credit card debt may be included, provided the card was used exclusively to
pay for qualified expenses.
• Money borrowed from a related person is not a qualified student loan. (11.5)
37. Where are moving expenses deducted on Form 1040? - ANSWER-Line 26, from Form
3903
38. What are qualified medical expenses with regards to an HSA? - ANSWER-Unreimbursed
medical expenses that would normally be deductible on Schedule A (11.16)
39. What form is used to report HSA contributions and determine any allowable deduction? -
ANSWER-Form 8889. Reported on Form 1040 Line 25.
40. What is a qualified retirement plan? - ANSWER-A plan which is eligible for favorable
tax treatment because it meets the requirements of IRC §401(a) and the Employment
Retirement Income Security Act of 1974 (ERISA) (21.2)
41. What is the 2009 contribution limit to 401(k) plans? - ANSWER-• The maximum
contribution for 2009 is $16,500 (and 2010).
