Is it okay to charge a borrower $20 for a credit report that cost $18.06 saying the extra $1.94 is for incidental charges? How much is a Bank allowed to charge for "incidental charges" before it becomes an upcharge?

If you can't identify your "incidental charge" and what it is for then you are already in trouble with Sec. 8. Not to mention the excess charges would be prepaid finance charges.

Dan's right. Read FIL-103-99. Here's a little excerpt:
Fee Splitting and Payments for Services Not Performed:
Examiners have noted recent incidents in which the fee collected by a financial institution for a third-party service exceeded the amount the institution actually paid to that third party. For example, a financial institution charged customers $25 for a flood hazard determination, yet the flood hazard determination firm that provided the service was only paid $20. In another example, customers were charged $40 for a credit report, but the financial institution only paid $15 to the consumer-reporting agency for the consumer report. Examiners also discovered an incident in which an institution charged customers an appraisal evaluation fee. The fee was passed on to a committee comprised of several members of the institution's board of directors, which did not actually review the appraisals. HUD has opined that these arrangements constitute fee splitting or receipt of unearned fees and therefore violate Section 8(b) of RESPA.