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1. Registered Tax Return
Preparer
Complementary Exam
Preparation Resources

2. 1040 Exam Prep
How to Master the IRS Exam Outline, Grasp
More in Less Time, and Pass the RTRP
Competency Exam
Do you HAVE TO take the IRS competency examination?
...But you are concerned because of the extensive IRS Return Preparer Test
Specifications?
You are not alone!
Many tax preparers are feeling divided between embracing the challenge of
either passing this competency exam or going out of business.
Think a little about it! You can make it happen with a few smart moves.
Consider these tips:
Tip 1: Make your initial tax knowledge diagnosis: Identify your weak and
your strong areas of knowledge.
Tip 2: The test is an academic exam: You need to brush on the IRS Code’s
terminology.
Tip 3: The mind is visual-learning oriented: Use visual study material
The last tip is especially important if you haven’t taken a test for many years.
Visual study material will help your recall. Mind maps and slide presentations are
exceptional visual study aids.

3. You will realize that once you begin to study, one topic at a time, it really is not a
big deal; you can do this!
You know this stuff. You just need to organize your knowledge for an academic
exam. You already have the hardest part: the practice. Nothing to be afraid of!
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Featured 1040ExamPrep Articles
Let’s begin to take control of the exam outline by reading the articles listed below,
covering the big picture on specific tax subjects included in the IRS Return Preparer
Test Specifications domains:
Start with the following five articles
 The RTRT Exam Seven Domains in Article: Collection of Taxpayer Data
 Treatment of Income and Assets at a Glance
 Treatment of Retirement Income in Its Diverse Forms
 Taxpayers Disposing their Properties and the Income Tax Treatment
Behind
 Deductions from Gross Income
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4. REGISTERED TAX RETURN PREPARER EXAM OUTLINE:
COLLECTION OF TAXPAYER DATA
Among the several topics included in the Registered Tax Return Preparer competency
examination is the collection of taxpayer’s data. Why it is important and what are its
implications, for both the tax preparers and the taxpayer, is examined in this article.
Collection of taxpayer's data is part of the basic tax return preparer competency and the
tax return preparer must be successfully tested on it in order to obtain the title of
registered tax return preparer.
Why is collecting taxpayer's data so important? What is the competency
knowledge required of tax preparers on this topic?
As the Internal Revenue Service states, the registered tax return preparer (RTRP) test
will focus on the ethical responsibilities that federal tax return preparers have in
completing a form 1040 series return, including the schedules and complementary
forms. The tax return preparer's ethical responsibility is to produce a tax return that is
truthful, accurate, and free of errors for their taxpayer-clients. In meeting this
responsibility, the collection of the taxpayer-client data becomes a crucial part of the tax
preparer's work.
Collecting a complete and accurate set of data from a taxpayer will help the professional
tax return preparer to determine the correct tax profile for that taxpayer and meet the
ethical responsibility of both the tax professional and the taxpayer. Successful taxpayer
data collection and correct processing of such data requires the work of a competent tax
return preparer. The Registered Tax Return Preparer competency examination is all
about assuring that competency.
The federal tax return preparer is expected to be well versed on important tax related
issues and events that should be inquired of the taxpayers in order to collect the
necessary information to determine a real-representative tax profile for the taxpayer.
For example, collecting the taxpayer's complete biographical information (i.e. age,

5. marital status, citizenship, etc.) will help determine the correct filing requirements as
well as the filling status for the taxpayer. Collecting the right data about the taxpayer's
taxable and non-taxable income from all sources, that the taxpayer had for the tax year,
will directly impact the tax liability determined for the taxpayer. The review of a
taxpayer's previous year’s return provides information for comparison and carryover for
the current year's return.
The tax preparer's data collection function also includes making clear to the
taxpayer/client that all the pertinent information requested should be provided if a tax
return is to be accurately prepared. Usually, tax return preparers are able to collect all
the information required of the taxpayer by presenting the taxpayer with a set of
"organizer forms". Organizer forms are a set of documents designed to collect the
information required to prepare a tax return. It is a very useful tool for both the tax
return preparer and the taxpayer client. It helps the taxpayers visualize the list of
documentation they need to gather and information to provide to the tax professional in
order to have a return prepared.
Organizers are forms designed to collect information required to prepare a tax return.
At the same time, in light of all the information required to prepare a return an
“organizer-form” completed and signed by a client provides the tax return preparer with
the documental support to generate a tax return preparation. The documents provided
are valuable in the event an audit is called on the return by the IRS, as well as to
maintain a healthy relationship between the client and the tax-return preparer.
Of course the input and output of the tax return preparation process is the mutual
responsibility of both parties involved: taxpayer and tax return preparer. With the new
regulations being implemented in the tax return preparation industry, the professional
responsibility of tax preparers is increased and there are new punitive measures
included that can go as far as revoking the registered tax return preparation
authorization to practice in the profession.
The Registered Tax Return Preparer competency examination has an extensive outline of
topics. Collection of taxpayer data was chosen as the first topic in this series of articles

6. because of its inherent importance. Articles to follow in this series will cover most topics
contained in the Registered Tax Return Preparer competency examination outline.

7. REGISTERED TAX RETURN PREPARER EXAM TOPIC
TREATMENT OF INCOME AND ASSETS
To prepare income tax returns for individual and self-employed taxpayers, tax return
preparers are called on to show a basic competency on topics related to the tax
treatment of income and assets. In this article I explore the content of that basic
competency.
The treatment of income and assets is one of the most comprehensive topics in the
RTRP competency exam outline. It represents 22 percent of the content of the test
material. That is easy to understand because the tax treatment of "income" is at the
core of the income tax preparation industry. But also because the tax treatment of
income and assets has several crucial aspects to consider in a tax return preparation
process in which general rules have innumerable exceptions to be aware of. So, it is not
surprising that the tax return preparer will be highly tested in these topics in the RTRP
competency exam.
What the examiners expect you to know about this topic?
As in most competency or certification exams, you are expected to master the basic
regulations related to each topic the candidate is tested on, both conceptually and from
a practical point of view. So, know the big picture of the conceptual framework for a
topic and be able to apply it to specific tax situations.
Because the registered tax return preparer exam focuses on the Form 1040, what we
are referring to here applies to incomes for employees and for the self-employed; it does
not include the income analysis of any type of corporation. Thus, the examiners will
expect the RTRP candidate to master the basics of the tax treatment of at least the
following type of income:
 Income from personal service sources (employee compensation);
 Income from property – interest, dividend (ordinary and qualified), rental income
and royalty;
 Income from partnerships, S-Corporations, trusts, and estates (Form K-1)

8.  Small business income and expenses – (self-employed income)
 Gains and losses from transactions in properties;
 Income specifically included in gross income in Sections 71-90 of the Internal
Revenue Code (IRC).
Regarding any type of income, the distinction between a taxable and non-taxable
income is at the core of a tax preparer competency. A general rule is that all types of
income from all sources are subject to income tax unless they are specifically exempted
by law. In order to determine the taxable income for a period, tax preparers also must
have mastered, to same degree, the several inclusion and exclusion of income
specifically established in the Internal Revenue Code.
In addition to the above general rule related to income, another important concept, from
the income tax perspective, is that income implies an increase in wealth, recognized for
tax purposes only upon realization. This concept of income as a net amount brings in
place the several items of deductions, personal exemptions and credits used in
determining the taxable income for a tax period. For example, in a property transaction
(the sale of a property) gross income is the net amount resulting by subtracting the
adjusted basis of the property sold from the gross proceeds of the sale. This is the
concept called as "recovery of capital" established by the Supreme Court and it says "“In
any property transaction, recovery of capital means that the taxpayer will be taxed only
on the portion of income that exceeds the capital invested and only after recovery of
that capital”
Regarding the tax treatment of assets or properties, there are several rules that are the
basis of tax return preparation. First, when preparing an individual return, the Form
1040 end result is a financial position (cash flow) and not an economic position (balance
sheet). Thus, assets come into play when they are the object of some transaction that
increased the taxpayer’s wealth (income) and a result (gain or loss) can be determined.
Basic sub-topics of the tax treatment of assets can be: 1) adjusted basis determination;
2) capital recovery methods (depreciation); 3) types of assets and gain/loss (ordinary,
capital, Section 1231) among others.

9. The analysis of income and gross income also requires from a professional tax return
preparer a thorough understanding of other related concepts such as: general and
special rules of filing information; filing status rules, fiscal tax period of inclusion of
income and expenses, the accounting method rules used to compute income and
expenses, etc.
Treatment of income and assets is a main topic of the registered tax return preparer
exam. So, it will demand special attention from the candidates to the exam. In articles
that will follow we will continue to present a brief analysis of other topics included in the
outline for the Registered Tax Return Preparer competency examination.

10. REGISTERED TAX RETURN PREPARER EXAM TOPIC
RETIREMENT INCOME
In as much as the tax treatment of the different sources of income a taxpayer may have
is a core competency for tax preparers, in separate articles that will follow I will be
covering the analysis of specific types of income, from the exam content framework. In
this essay the focus is the tax treatment of retirement income in its diverse forms.
The Registered Tax Return Preparer (RTRP) exam outline includes a sub-domain on
retirement income with the specific topics to be tested in the competency exam. In
addition, contribution deductions are included in the “adjustments to income” sub-
domain. As the regulation about retirement plans are so extensive to the point of being
a career specialty in the financial world, the question is how deep exam candidates
should go in reviewing this topic in their preparation for the RTRP exam. The main rules
to know are covered in this article.
The First aspect of the tax treatment of the retirement plans, pension plans and
annuities to be aware of is their duality: contributions and distributions. For the
preparation of an income tax return, there are general rules for contributions and
distributions of retirement plans and also some annually updated information you need
to know for your exam.
Contributions to retirement accounts are deferred compensation arrangements
available to employees and self-employed individuals. For employees, a private
retirement security is a complement to their contribution to Social Security. They
constitute some tax advantages enacted by Congress to encourage the use of private
retirement plans by both employees and the self-employed.
For employees, amounts of contribution to a retirement plan have two tax advantages:
1) An exclusion from gross income (for qualified employee plan); and 2) A deduction
from gross income for the contributions to a traditional Individual Retirement Account
(IRA), to a maximum amount of $5,000 for 2011 ($6,000 for those older than 72).

11. This tax advantage is available also for self-employed taxpayers. For 2011, the
maximum contribution and deduction for a defined-contribution self-employed
retirement plan (HR10 or a Keogh plan) was the lesser of $49,000 or 100% of the
earned income for that year. The self-employed taxpayer may deduct contributions
made, up until the due date of the tax return, including extensions.
The key points about tax advantages of contributions to retirement plans are the
requirement to qualify for the exclusion and deduction as well as the several amounts
limitations.
Regarding the tax treatment of distributions from a retirement plan, pension plan, and
annuities, they are generally taxable and documented in a Form 1099 to the beneficiary-
taxpayer. When the funds are distributed to the beneficiary, the amount distributed can
be fully taxable or partially taxable. Tax treatment depends on several variables such as
type the plan (qualified or non-qualified), type of account (retirement plan, annuity or
pension), type of distribution, etc.
Examples of types of plans offered to employees include: qualified pension plans,
qualified profit sharing plans, Simple IRAs and 401(k) plans, tax-deferred annuities,
cash or deferred arrangement plans, incentive stock options plans, non-qualified
deferred compensation plans, restricted property plans, cafeteria benefit plans, and
employee stock purchase plans.
Regarding annuities, generally each monthly annuity payment is made up of a tax-free
part that is a return on the taxpayer’s net cost, and a taxable balance.
For income tax purpose there are two methods of determining the tax-free part of a
pension or annuity income: the general rule (Publication 939), and the simplified method
(Publication 575).

12. Information regarding the taxable and the non-taxable portions of the benefits is usually
provided to a tax preparer by the payor and issuer of the Form 1099 supporting the
income-distribution. However, there are several aspects of the process that the tax
preparer must be knowledgeable about such as determination of the basis in an IRA,
determination of taxable social security benefits, applicable requirements for
distributions (minimums, terms, etc.)
Retirement income is another topic included in the Registered Tax Return Preparer
competency examination. Its main aspects have been examined in this article. In
following essays, I will continue the analysis of another topic from the exam specification
outline.

13. REGISTERED TAX RETURN PREPARER EXAM OUTLINE
PROPERTY, REAL AND PERSONAL
Beginning in 2011, tax return preparers are required to meet the requirement of passing
a competency exam in order to officially become a registered tax return preparer.
Examiners expect the tax return preparer to have a basic foundation on the subject of
taxes in order to deliver an accurate and complete income tax return to their clients. If
you are planning to take the IRS competency exam, this series of articles will introduce
you to specific topics included in the test. In this article, a brief reference is made to the
tax treatment of transactions in property.
When a property is object of a transaction (sale, purchase, exchange, or other kind of
disposition), usually at least two parties are involved: the seller and the buyer. From the
income tax return preparation point of view, a primary aspect related to transactions in
property is that the transaction has income tax effect for the seller but not for the buyer.
So, the party selling or disposing of the property is the taxpayer-client. Information
about transactions in property, where the taxpayer-client is the buyer, is used only to
determine the basis of that property for the purpose of the sale or disposition of that
property.
With regard to the tax treatment of income, gains or losses may result from the
disposition or sale of properties by the party making the sale or disposing of the
property.
How does tax regulation treat a sale or disposition of a property, and what should the
registered tax return preparer’s foundation be on this topic in order to comply with the
competency requirements?
The IRS return preparer test specification, which outlines all major topics in seven
domains, sub-domains and detailed topics, includes four specific tax issues related to
transaction in property that candidates need to be familiar with in order to be successful
in the competency exam. These tax issues are: 1) Capital gains and losses (short-term

14. and long-term); 2) Determination of the basis of properties; 3) Disposition of non-
business assets; 4) Sale of principal residence.
An important concept behind the tax treatment of property transactions is the distinction
regulations make between realized gain or loss and recognized gain or loss. The amount
realized is the difference between the selling price of a property and any costs of
disposition incurred by the seller.
In a algebraic sum, Realized gains or losses = Amount realized from the sale –
Adjusted basis of the property.
The rule calls for all realized gains to be recognized or taxable unless a specific part of
the tax laws excludes the gain. Realized losses have circumstantial tax treatment and
therefore, they may or may not be recognized or deductible. For example: losses
resulting from the disposition of personal use property are not deductible. Another
example, if a single taxpayer sold his or her principal residence for $700,000 and the
basis of the property is $400,000, the realized gain is $300,000 but the recognized gain
is $50,000 because of a deductible allowed by law ($250,000 for single taxpayers,
$500,000 if married).
Recognized gains and losses may be classified as ordinary gains or as capital gains.
Ordinary gains are fully taxable. Ordinary losses are fully deductible. Capital gains and
losses use a netting rule in order to determine the end gain or loss.
A solid knowledge foundation on the subject of taxes, required to pass the competency
exam, is built up step by step and with a persistent interest in learning more about the
subject. In the next article, we will focus on “deductions”; don’t miss it!
To summarize, beginning in 2011, tax return preparers are required to pass a
competency exam in order to officially become a registered tax return preparer.
Examiners expect from them the basic foundation on the subject of taxes in order to
deliver an accurate and complete income tax return to their clients. This series of
articles covers specific topics included in the IRS test. This essay was a brief reference to
the tax treatment of transactions in property.

16. REGISTERED TAX RETURN PREPARER EXAM OUTLINE
DEDUCTIONS FROM GROSS INCOME
Since Prometric started accepting registrations for the registered tax return preparer examination on
November 28, 2011, many tax return preparers have begun their review of the Form 1040 materials in
order to sit for the competency exam. One topic included in the list of materials to be covered in the
examination is deduction from gross income. This article examines the basics of that tax subject.
Adjusted gross income (AGI) and taxable income are two partial results calculated in the Form 1040.
Both amounts are very important in the preparation of an income tax return.
In addition, the components for their determination (income, deductions, and credits) are topics highly
tested in the competency examination for tax return preparer. Examiners are demanding from
registered tax return preparer candidates a strong foundation in the determination of the adjusted gross
income and taxable income, which includes the knowledge of the income tax rules for taxable and
non-taxable income, tax deductions, and tax credits.
A previous article covered the topic of income this article focuses on the other component used to
determine the AGI and taxable income. In other words, the two types of deductions.
There are two main groups of deductions: 1) “For AGI” or “above the line” deductions and 2) personal
deductions or “From AGI”, or “below the line” deductions.
One first important distinction between both kinds of deduction is where they are reported in the Form
1040. The “For AGI” or “above the line” group of deduction are included on page 1 of Form 1040 and
they are used to determine the adjusted gross income. Personal deductions or “From AGI” or “below
the line” group are reported on page 2 of Form 1040.
Section 62 of the Internal Revenue Code has a lists the “for AGI” or “above the line” deductions. A
partial list of those deductions includes:
 Expenses for elementary and secondary teachers, up to $250 for supplies;
 Certain business expenses of reservists, performing artists, and fee-based officials;
 Expenses incurred by a taxpayer as an employee in connection with the services performed for
an employer – Form 2106 or Form 2106EZ;
 Contributions to a Health Savings Account (HSA deduction) – Form 8889;
 Moving expenses – Form 3903;
 Half of self-employment tax – Schedule SE.

17.  Deduction for medical insurance premium paid to cover a self-employed taxpayer, spouse, and
dependents;
Regarding personal deduction or “From AGI” or “below the line” group reported on page 2 of the
Form 1040, taxpayers can opt for the method of deduction that lowers their tax liability or between the
standard deduction and itemized deductions.
The standard deduction is a dollar amount that depends on the taxpayer’s filing status. It is actualized
periodically, by law.
Itemized deductions are exceptions to the general rule, as indicated in Section 262 of the Code. The
general rule is that personal expenses are not allowable deductions. However, by law, Congress has
allowed the deduction of specific personal expenses as itemized deductions. Any personal
expenditures not included in the tax law as allowable itemized deductions are non-deductible expenses
for tax purposes.
Major personal expenditures allowed as itemized deductions include:
 Medical and dental expenses;
 Taxes;
 Interest expense;
 Investment expense;
 Charitable contributions;
 Personal casualty and theft gains and losses;
 Miscellaneous deductions.
Basic competency for an accurate and complete tax return preparation is what the examiners are
expecting from candidates sitting to be tested. The topic of deductions, which is a very important
component of a return preparation, is analyzed in this article to guide candidates in their preparation to
become registered tax return preparers.