Question

Zubin Ltd. had set the transfer price at $40 for the purchase of goods from its U.S. subsidiary. But the IRS audited the transfer price and determined that it should have been using a transfer price of $190. Assuming the adjustment results in an increase in U.S. tax liability of $200,000. Determine the penalty amount.

Answer 1

Zubin Ltd.

The Penalty amount is:

Minimum = $10,000

Maximum = $50,000

Step-by-step explanation:

a) Data and Calculations:

Company set transfer price = $40

IRs determined transfer price = $190

Increase in U.S. tax liability = $200,000

IRS penalty rate = 5% minimum for each month of default and not exceeding 25% maximum

Therefore, the penalty amount:

Minimum = $10,000 (5% of $200,000)

Maximum = $50,000 (25% of $200,000)