The IRS statute of limitations is the time the IRS has to resolve any issues with your tax account. Unreported income is income which was not included on your original income tax return. In most instances, this income is subject to the same collection and assessment penalty of ordinary income -- 10 years for collection and three years for assessment. This means that the IRS has three years from the date the return is filed to assess additional tax and 10 years from the date of assessment to collect any tax owed. However, if the amount of unreported income is substantial, then the IRS has the right to extend the statute on assessment.
An understatement of more than 25 percent of the gross income listed on the return is considered a substantial understatement. The IRS has six years from the time the return was filed to assess additional tax.
The statute on the unreported income includes any penalty or interest amounts added onto your tax. The failure to pay a penalty, the most common penalty associated with unreported income, is one half of 1 percent for each month the tax on the unreported income is unpaid. You could also be assessed an accuracy penalty if your understatement is substantial. Interest is set quarterly.
Until the statute has expired, the IRS has a number of enforcement actions that may be used to recover the tax as well as accumulated interest and penalties, the most serious of which is a levy. A levy allows the IRS to seize both real and intellectual property (such as copyrights) to be sold and applied to the tax owed. If you owe money to the IRS, it is best to set up an installment agreement to make arrangement to pay even if you can't pay the full amount. An installment agreement will allow you to make monthly payments on your debt until it is paid in full. The cost of an installment agreement is $105, but it is reduced to $52 for taxpayers who agree to have the money direct debited from their accounts.