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 calls for the accounting method used in the business.
What is the difference between the cash method and 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.
What is meant by saying that 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. related to product production
or preparation for resale, less ending inventory. (15.7)
- If the client has contract labor, what would you remind the client that they
must do? - ANSWER • Give 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
reasonable effort to prepare accurate and complete returns.
• Tax Professionals must be knowledgeable about tax law, and apply a
reasonability check to the information their clients provide. (26.1)
What is an intensive interview? - ANSWER An intensive interview is one
where the interviewer asks questions about general information and continues
asking more questions if the information received seems incomplete, invalid, or
inconsistent. (26.2)
, What is a conflict of interest? - ANSWER A conflict of interest is a situation
in which one circumstance has the potential to benefit at the expense of another
situation. (26.3)
What constitutes an action that resolves a conflict of interest? - ANSWER A
conflict of interest is resolved once it is identified, disclosed to the parties, and
the parties have agreed to waive the conflict. (26.3)
What client information is deemed confidential? - ANSWER Anything that
may identify the client is considered confidential.
Information includes but is not limited to:
• Name
• Address and phone number
• Social security numbers
• Employer
• Information contained on a tax return (26.4)
Is it permissible for a Tax Professional to leave a substantive phone message for
a client regarding their completed tax return? - ANSWER • A Tax Professional
must have explicit permission from the client to leave substantive phone
messages.
• A taxpayer being the client of a Tax Professional or tax preparation business is
information that is to be kept confidential and not disclosed. (26.5)
If a Tax Professional determines that a client has not complied with any tax law,
what must the Tax Professional do? - ANSWER The Tax Professional must
notify the client in writing regarding the potential noncompliance problem and
his or her penalty for not taking action to eliminate the noncompliance. (26.7)
receive from the person who paid him for his services? - ANSWER Form
1099-MISC (15.6)
Schedule C, Line F calls for the accounting method used in the business.
What is the difference between the cash method and 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.
What is meant by saying that 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. related to product production
or preparation for resale, less ending inventory. (15.7)
- If the client has contract labor, what would you remind the client that they
must do? - ANSWER • Give 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
reasonable effort to prepare accurate and complete returns.
• Tax Professionals must be knowledgeable about tax law, and apply a
reasonability check to the information their clients provide. (26.1)
What is an intensive interview? - ANSWER An intensive interview is one
where the interviewer asks questions about general information and continues
asking more questions if the information received seems incomplete, invalid, or
inconsistent. (26.2)
, What is a conflict of interest? - ANSWER A conflict of interest is a situation
in which one circumstance has the potential to benefit at the expense of another
situation. (26.3)
What constitutes an action that resolves a conflict of interest? - ANSWER A
conflict of interest is resolved once it is identified, disclosed to the parties, and
the parties have agreed to waive the conflict. (26.3)
What client information is deemed confidential? - ANSWER Anything that
may identify the client is considered confidential.
Information includes but is not limited to:
• Name
• Address and phone number
• Social security numbers
• Employer
• Information contained on a tax return (26.4)
Is it permissible for a Tax Professional to leave a substantive phone message for
a client regarding their completed tax return? - ANSWER • A Tax Professional
must have explicit permission from the client to leave substantive phone
messages.
• A taxpayer being the client of a Tax Professional or tax preparation business is
information that is to be kept confidential and not disclosed. (26.5)
If a Tax Professional determines that a client has not complied with any tax law,
what must the Tax Professional do? - ANSWER The Tax Professional must
notify the client in writing regarding the potential noncompliance problem and
his or her penalty for not taking action to eliminate the noncompliance. (26.7)
