TAX 3701 2026 COMPLETE SOLUTION SCRIPT
ACCURATE RESPONSES A+
◉ 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? 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)
◉ 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? Answer: 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? 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? Answer: To pay social
security and medicare taxes. (15.14)
◉ 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)
◉ 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)
◉ 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? 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)
◉ 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?
ACCURATE RESPONSES A+
◉ 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? 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)
◉ 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? Answer: 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? 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? Answer: To pay social
security and medicare taxes. (15.14)
◉ 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)
◉ 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)
◉ 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? 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)
◉ 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?
