The Solomon Exam Prep Guide: Registered Tax Return Preparer Test

by Terry Ginelli

Overview

Do the terms acquisition indebtedness, net unrealized appreciation, and recapture of depreciation leave you scratching your head? Will you need to pass the Registered Tax Return Preparer (RTRP) test? If your answer to both of these questions is yes, then you've come to the right place.

If you will be required to pass the IRS-sponsored RTRP exam, this must-have book is the perfect study guide. It follows the seven distinct sections of RTRP test content, per IRS guidelines, all focusing on filing the basic 1040 tax form and supporting forms and schedules. Even if the test is not required, this guide still serves as a compact and affordable source of essential information enabling you to function successfully as a Tax Return Preparer.

In addition to the basics of tax preparation, the RPRT test (and this guide) includes sections dealing with tax preparer responsibilities and ethical considerations. Each of the seven sections of this guide contains topics, examples drawn from popular culture, and review questions; a glossary and complete 118-question practice test (separated into sections) follow at the end of the book.

Once you've mastered this compact 168-page volume, you will be prepared to proceed with confidence!

Product Details

ISBN-13:	9781610070362
Publisher:	First Books
Publication date:	02/07/2013
Pages:	168
Product dimensions:	8.25(w) x 11.00(h) x 0.36(d)

About the Author

TERRY GINELLI graduated from Stanford University in 1977 with a Master's Degree in Mechanical Engineering. He worked overseas in petroleum exploration (Europe and North Africa) until the early '80s. After returning to the U.S. he worked as an engineer and in management for arms in industrial equipment, oil field equipment, and pharmaceuticals; during those years he also earned an MBA degree from Cal State Fullerton. In 1991 Terry retired from engineering to open his own shipping business in the Central Valley of California. Besides operating the business, Terry is a Certifed Tax Preparer and is kept busy preparing returns from January through April. Terry also works on a contract basis with the Small Business Administration and is "on call" as a Disaster Relief Specialist with the SBA. A Commercial Pilot and Flight Instructor,
Terry spends as much time up in the air as he can.

Table of Contents

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vii

Section 1: Preliminary Work and Collection of Taxpayer Data. . . . . . . . . . . . . . . . . . . . . 1

1.1 Review prior year's return for accuracy, comparison, and carryovers for

current year return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1.2 Collect taxpayer's biographical information. . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Date of Birth and Age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Marital Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Citizenship Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Dependents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.3 Determine filing status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

1.4 Determine all sources of taxable and non-taxable income. . . . . . . . . . . . . . . . . . 6

1.5 Determine applicable adjustments to to gross income. . . . . . . . . . . . . . . . . . . . 12

1.6 Determine Standard Deduction and Schedule A Itemized Deductions . . . . . . . 15

Standard Deduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Itemized Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

1.7 Determine applicable Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

1.8 Understand tax payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

1.9 Recognize items that will affect future returns. . . . . . . . . . . . . . . . . . . . . . . . 24

1.10 Determine special filing requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

1.11 and 1.12 Determine filing requirements and due dates. . . . . . . . . . . . . . . . . 25

1.13 Determine personal exemptions, including dependents. . . . . . . . . . . . . . . . . . 26

1.14 Determine qualifying child/relative tests for Earned Income Credit and

other credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Section 1 Quick Quiz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Section 2: Treatment of Income and Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

A. Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

2.A.1 Taxability of wages, salaries, tips and other earnings. . . . . . . . . . . . . . . . . . 33

2.A.2 Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

2.A.3 Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

2.A.4 Self-Employment income and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

2.A.5 Rental income and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

2.A.6 Forgiveness of debt as income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

2.A.7 Other types of income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

B. Retirement Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

2.B.1 Social Security Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

2.B.2 Taxable distributions from Traditional IRA accounts. . . . . . . . . . . . . . . . . . 40

2.B.3 and 2.B.4 Distributions and RMDs from Qualified Plans (401(k),

IRA, Roth IRA, et al). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

C. Income Derived From Property Transactions. . . . . . . . . . . . . . . . . . . . . . . . . 41

2.C.1 Short- and long-term capital gains and losses. . . . . . . . . . . . . . . . . . . . . . . 41

2.C.2 Determination of “Basis”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2.C.3 Sales of non-business assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

2.C.4 Sale of a principal residence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

D. Adjustments to Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

2.D.1 Self-Employment Tax — Schedule SE Self-Employment Tax. . . . . . . . . . . . . 44

2.D.2 Tuition and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

2.D.3 Eligible Moving Expenses and Form 3903 . . . . . . . . . . . . . . . . . . . . . . . . 45

2.D.4 Other Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Section 2 Quick Quiz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Section 3: Deductions and Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

A. Itemized Deductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

3.A.1 Medical and Dental Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

3.A.2 State, Local and Real Estate Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

3.A.3 Mortgage Interest Deduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

3.A.4 Charitable Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

3.A.5 Miscellaneous Deductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

3.A.6 Employee Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

B. Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

3.B.1 Child and Dependent Care Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

3.B.2 Child Tax Credit and Additional Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

3.B.3 Education Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

3.B.4 Earned Income Tax Credit (EITC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

3.B.5 Retirement Savings Contribution Credit. . . . . . . . . . . . . . . . . . . . . . . . . . 57

Section 3 Quick Quiz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Section 4: Other Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

4.1 The Alternative Minimum Tax (AMT). . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

4.2 Early Distributions from Retirement Plans. . . . . . . . . . . . . . . . . . . . . . . . . . 62

4.3 Self-Employment Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

4.4 Unreported Social Security and Medicare tax. . . . . . . . . . . . . . . . . . . . . . . . 63

4.5 Repayment of First-Time Home Buyer Credit. . . . . . . . . . . . . . . . . . . . . . . . 64

Section 4 Quick Quiz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Section 5: Completion of the Filing Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

5.1 Check return for completeness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

5.2 Explain and review tax return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

5.3 Explain record-keeping requirements to the taxpayer. . . . . . . . . . . . . . . . . . . . 67

5-4 Discuss significance of signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

5.5 Tax Preparer's Responsibilities related to rejected electronic returns . . . . . . . . . 68

5.6 Timeframe for submitting electronic returns. . . . . . . . . . . . . . . . . . . . . . . . . . 68

5.7 Payment options for the taxpayer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Section 5 Quick Quiz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Section 6: Practices and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

6.1 Penalties to be assessed by the IRS…. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

6.2 Appropriate use of Form 8867 — Paid Preparer's Earned Income Credit

Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

6.3 Providing a copy of the tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

6.4 Signing a return and failure to furnish a PTIN . . . . . . . . . . . . . . . . . . . . . . 74

6.5 Keeping copies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

6.6 Complying with e-filing procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

6.7 Form 2848 (Power of Attorney and Declaration of Representative) and

Form 8821 (Tax Information Authorization) . . . . . . . . . . . . . . . . . . . . . . . . 75

6.8 Safeguarding taxpayer information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Section 6 Quick Quiz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Section 7: Ethics, Due Diligence and Best Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

7.1 Preparer's Due Diligence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

7.2 “Practice” before the IRS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

7.3 Limits on practice by Registered Tax Return Preparers (RTRPs). . . . . . . . . . . 80

7.4 Requirement to furnish information to the IRS upon request. . . . . . . . . . . . . . 80

7.5 Prompt disposition of matters before the IRS. . . . . . . . . . . . . . . . . . . . . . . . . 81

7.6 Prohibition on receiving assistance from or providing assistance to disciplined

tax practitioners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

7.7 Rules regarding fees and contingent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

7.8 Rules applicable to dealing with clients. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

7.9 Due diligence standards with respect to tax returns, other documents, other

tax matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

7.10 Responsibility of individuals who have principal authority over a firm's

tax practice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

7.11 Incompetence and disreputable conduct that can result in disciplinary

proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

7.12 Possible sanctions that may be imposed (under Circular 230). . . . . . . . . . . . 83

Section 7 Quick Quiz. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

Glossary of Tax Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

IRS Tax Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

RTRP Test Prep Sample Exam. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Section 1 Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Section 2 Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Section 3 Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

Section 4 Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Section 5 Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

Section 6 and 7 Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

RTRP Test Prep Sample Exam Answer Key. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Section 1 Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

Section 2 Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143

Section 3 Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146

Section 4 Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Section 5 Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

Sections 6 and 7 Answers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

Quick Quiz Answers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Section 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Section 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

Section 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

Section 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

Section 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

Section 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

Section 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155