The Internal Revenue Service Determined That Covington Ltd

question 44

Multiple Choice

The Internal Revenue Service determined that Covington Ltd. should have been using a transfer price of $400 for the purchase of goods from its U.S. subsidiary but had set the price at $50. What is the rate of penalty that the IRS can impose on the taxpayer?

• A) 10% of the amount of taxes underpaid
• B) 20% of the amount of taxes underpaid
• C) 40% of the amount of taxes underpaid
• D) 100% of the amount of taxes underpaid

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Definitions:

Economic Profit

The difference between total revenue and total costs, including both explicit and implicit costs, reflecting the true profitability of a business.

TR

Total revenue, representing the total sales income a firm receives from selling its goods or services.

TC

An abbreviation commonly used for Total Cost, which encompasses all costs incurred in the production of goods or services.

Scale Of Operation

Refers to the size at which a particular business or factory operates, considering factors like output, capacity, or the amount of work it can perform.