DETAILED ANSWERS|LATEST
UPDATE!!!!2025/2026|GUARANTEED PASS|GRADED
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)
1
,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)
2
, 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)
If the employee thinks his Form W-2 is not correct, what should he do? - ANSWER • If
the name or social security number is incorrect, the taxpayer may change it himself and
need not obtain a corrected W-2 before filing his tax return.
• The employer should be notified of the error and asked to update his records.
3
UPDATE!!!!2025/2026|GUARANTEED PASS|GRADED
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)
1
,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)
2
, 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)
If the employee thinks his Form W-2 is not correct, what should he do? - ANSWER • If
the name or social security number is incorrect, the taxpayer may change it himself and
need not obtain a corrected W-2 before filing his tax return.
• The employer should be notified of the error and asked to update his records.
3
