HRB-27 Final Exam Review Questions and Answers.

HRB-27 Final Exam Review Questions
and Answers.



What income reporting form should an independent contractor sometimes
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receive from the person who paid him for his services? - (correct answer) -
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Form 1099-MISC (15.6)
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Schedule C, Line F asks for the accounting method used in the business.
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What is the difference between the cash method and the accrual method of
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accounting? - (correct answer) -• Under the accrual method, total sales and
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total charges for services are included in income even though payment may be
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received in another tax year.
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• Under the cash method, only income actually received or expenses actually
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paid during the year are included. (15.5)
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What does it mean if a proprietor "materially participates" in the business? -
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(correct answer) -He is active in running the business in a substantial way on a
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day-to-day basis. (15.5)
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Why is it important to know whether or not the proprietor materially
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participates? - (correct answer) -If the proprietor does not materially
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participate, any loss from the business is a passive loss and generally may be
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currently deducted only against passive income. (15.6)
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What are returns and allowances? - (correct answer) -• Amounts that were
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refunded to customers who returned merchandise for refund or partial refund.
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• These amounts are subtracted from gross receipts. (15.6)
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How is cost of goods sold determined? - (correct answer) -Beginning inventory
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plus purchases, plus labor, supplies, depreciation, etc. attributable to product
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manufacture or preparation for sale, minus ending inventory. (15.7)
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,If the client has contract labor, what should you remind the client that they
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should do? - (correct answer) -• Provide a Form 1099-MISC to any independent
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contractor who worked and earned $600 or more. (15.9)
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What is the purpose of self-employment tax? - (correct answer) -To pay social
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security and medicare taxes. (15.14)
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What amounts does a proprietor have "at risk"? - (correct answer) -Amounts
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invested in the business plus any business debts for which the proprietor is
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personally liable. (15.16)
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What difference does it make if the proprietor is "at risk" or not? - (correct
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answer) -Only amounts at risk may be used to determine the actual loss on
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Schedule C. (15.16)
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How does a Tax Professional meet due diligence requirements? - (correct
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answer) -• Tax Professionals fulfill due diligence requirements by making every
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effort to prepare accurate and complete returns.
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• Tax Professionals must have knowledge of tax law, and apply a reasonability
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check to the information provided by their clients. (26.1)
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What is a thorough interview? - (correct answer) -A thorough interview
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consists of asking general information questions, then asking additional
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questions whenever information is incomplete or seems inaccurate or
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inconsistent. (26.2)
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What is a conflict of interest? - (correct answer) -A conflict of interest is when
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one's situation might benefit at the expense of another's situation. (26.3)
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What actions can resolve a conflict of interest? - (correct answer) -A conflict of
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interest is resolved when it is acknowledged, disclosed to all parties, and the
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parties have consented to waiving the conflict. (26.3)
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What client information is confidential? - (correct answer) -Any information
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that could potentially identify the client is confidential.
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Information includes (but is not limited to): n/ n/ n/ n/ n/ n/




• Name
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, • Address and phone number
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• Social security numbers
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• Place of employment
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• Any information from a tax return (26.4)
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Is it acceptable for a Tax Professional to leave a detailed phone message for a
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client, letting them know their tax return is complete? - (correct answer) -• Tax
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Professionals must have prior consent from the client to leave phone messages
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related to their tax return.
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• The fact that a taxpayer is the client of a Tax Professional or tax preparation
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business is confidential information that must not be disclosed. (26.5)
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What is a Tax Professional's responsibility upon finding out that a client has not
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complied with any tax law? - (correct answer) -A Tax Professional must advise
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the client of the noncompliance and the consequences for not correcting the
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situation. (26.7)
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What action should a Tax Professional take if a client insists on reporting
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information that is inaccurate? - (correct answer) -A Tax Professional should
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never prepare a return that contains inaccurate information. (26.7)
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If the employee thinks his Form W-2 is not correct, what should he do? -
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(correct answer) -• If the name or social security number is incorrect, the
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taxpayer may change it himself and need not obtain a corrected W-2 before
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filing his tax return.
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• The employer should be notified of the error and asked to update his records.
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• Furthermore, the employee's social security number and earnings records
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should be verified with the Social Security Administration to ensure that the
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earnings were properly credited. (2.17)
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Where can the regular standard deduction amounts be found? - (correct
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answer) -• In the left-hand margin at the top of page 2 of Forms 1040 and
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1040A.
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• They are: S, MFS $5,700; MFJ, QW $11,400; HH $8,400.
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