TAX PREPARER FINAL EXAM REVIEW
QUESTIONS WITH VERIFIED ANSWERS
What income reporting form should an independent contractor sometimes receive from
the person who paid him for his services?
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?
• 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)
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)
What client information is confidential?
Any information that could potentially identify the client is confidential.
QUESTIONS WITH VERIFIED ANSWERS
What income reporting form should an independent contractor sometimes receive from
the person who paid him for his services?
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?
• 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)
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)
What client information is confidential?
Any information that could potentially identify the client is confidential.
