Tax Preparer Final Exam Review || QUESTIONS &
ANSWERS RATED 100% CORRECT!!
What income reporting form should an independent contractor sometimes receive from the
person who paid him for his services? correct answers 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?
correct answers • 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? correct answers
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? correct
answers 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? correct answers • 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? correct answers 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? correct
answers • 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? correct answers To pay social security and
medicare taxes. (15.14)
What amounts does a proprietor have "at risk"? correct answers 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? correct answers 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? correct answers • 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? correct answers 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? correct answers 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? correct answers 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? correct answers 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? correct answers • 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? correct answers 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? correct answers 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? correct answers • 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.
• Furthermore, the employee's social security number and earnings records should be verified
with the Social Security Administration to ensure that the earnings were properly credited.
(2.17)
Where can the regular standard deduction amounts be found? correct answers • In the left-
hand margin at the top of page 2 of Forms 1040 and 1040A.
• They are: S, MFS $5,700; MFJ, QW $11,400; HH $8,400.
• The amounts differ for taxpayers age 65 or older or blind and those who may be claimed as
dependents by other taxpayers.
[2010]
ANSWERS RATED 100% CORRECT!!
What income reporting form should an independent contractor sometimes receive from the
person who paid him for his services? correct answers 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?
correct answers • 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? correct answers
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? correct
answers 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? correct answers • 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? correct answers 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? correct
answers • 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? correct answers To pay social security and
medicare taxes. (15.14)
What amounts does a proprietor have "at risk"? correct answers 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? correct answers 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? correct answers • 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? correct answers 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? correct answers 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? correct answers 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? correct answers 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? correct answers • 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? correct answers 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? correct answers 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? correct answers • 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.
• Furthermore, the employee's social security number and earnings records should be verified
with the Social Security Administration to ensure that the earnings were properly credited.
(2.17)
Where can the regular standard deduction amounts be found? correct answers • In the left-
hand margin at the top of page 2 of Forms 1040 and 1040A.
• They are: S, MFS $5,700; MFJ, QW $11,400; HH $8,400.
• The amounts differ for taxpayers age 65 or older or blind and those who may be claimed as
dependents by other taxpayers.
[2010]
