HRB-27 Final Exam Review
Comprehensive Questions
(Frequently Tested) with
Verified Answers Graded A+
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.
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? - 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)
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)
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)
Comprehensive Questions
(Frequently Tested) with
Verified Answers Graded A+
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.
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? - 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)
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)
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)
