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Sie = you (formal) sie = she But the start of a sentence will capitalise either word of course. In that instance it could be either and you'll have to look at the context etc. or what form the verb is in: e.g. trinken is the 'Sie' (you) form, whilst trinkt is the 'sie' (she) form.
You could add an adverb of time or the like if you think the difference is important.
Trinkt sie gerade etwas? "Is she drinking something right now?"
Trinkt sie regelmäßig? "Does she drink regularly?"
Trinkt sie im Allgemeinen? "Does she generally drink?"
Context generally makes it clear what you mean.
That's fine. Then the basic advice I'd give is "don't worry about it".
English has more tenses than German does - just map either of "present simple" or "present continuous" to the one present tense in German; and when translating the other way, often either way in English will make sense -- just pick one.
And if not, pick the tense that will make sense in English.
Trinkt sie? = Is she drinking?
Trinken sie? = Are they drinking?
Trinken Sie? = Are you (formal) drinking?
So the difference between "they" and "formal you" is only in the capitalisation.
The difference between those two and "she" is in the verb form.
Note that Sie is not only singular -- you would use it whether you're speaking to one person or to several people as long as you're being formal.
No, it's not accepted, because that is not a neutral question.
It uses statement word order and question intonation, and (at least in the English I'm familiar with) you would use it when you heard something surprising and wanted to confirm that you heard it correctly.
But to ask a neutral question for information, you need question word order, which is "Is she drinking?" with the verb at the beginning.
(Often, that verb will be a helping verb "do", but the verb "to be" does not need do-support in questions.)
Firstly, because the sentence has sie (lowercase) and not Sie.
Secondly, because Sie (the polite you) requires a third-person-plural verb form.
So "Do you drink?" would be Trinken Sie? with the third person plural verb form trinken, not the third person singular verb form trinkt.
Because that means something else -- "Is she (currently) in a state of intoxication after having consumed alcohol?"
And not "Is she (currently) drinking something liquid (e.g. water)?" or "Does she (regularly) drink things (alcoholic or not)?", which is what Trinkt sie? means.