1. Executive Summary, Regulatory Background & Applicability Date
With the publication of Treasury Decision 10027 (TD 10027) in the Federal Register (90 FR 3376) on January 14, 2025 (effective January 14, 2025), the U.S. Department of the Treasury and the Internal Revenue Service finalized long-anticipated regulations implementing Internal Revenue Code (IRC) Section 2801. To administer Section 2801, the IRS officially released Form 708 (United States Return of Tax for Gifts and Bequests Received From Covered Expatriates) and its accompanying instructions (dated December 2025 / released January 2026).
IRC § 2801 imposes a federal transfer tax on United States citizens, U.S. resident domiciliaries, domestic trusts, and foreign trusts electing domestic trust treatment who receive "covered gifts" or "covered bequests" directly or indirectly from "covered expatriates."
A primary question practitioners confront is: "My client's relative expatriated in 2015 and has been gifting funds annually; what filing rules apply to those earlier transfers?"
View or download official statutory texts and IRS forms directly from our reference repository:
- Treasury Decision 10027 (TD 10027) - Section 2801 Final Regulations (PDF)
- IRC Section 2801 Statutory Text - Imposition of Tax on Covered Gifts/Bequests (PDF)
- IRS Form 708 - U.S. Return of Tax for Gifts/Bequests From Covered Expatriates (PDF)
- IRS Instructions for Form 708 (December 2025 / Released Jan 2026) (PDF)
- IRC Section 6039F Statutory Text - Foreign Gifts (PDF)
2. Statutory Mechanics of IRC § 2801
40% Top Estate Tax Rate
Under § 2801(a), the Section 2801 tax equals the highest marginal federal estate tax rate (currently 40%) multiplied by the net value of covered gifts and covered bequests received by the U.S. recipient during the calendar year in excess of the annual statutory exclusion.
Recipient Payment Obligation
Under § 2801(b), the tax must be paid directly by the person receiving the gift or bequest (U.S. citizen, resident domiciliary, domestic trust, or electing foreign trust).
Annual Statutory Exclusion (§ 2801(c))
Section 2801 tax applies only to the extent that the total value of covered gifts and covered bequests received by a recipient during a calendar year exceeds the indexed annual gift tax exclusion under IRC § 2503(b):
- Calendar Year 2025 Exclusion: $19,000
- Calendar Year 2026 Exclusion: $19,000
Recipient-Level Aggregation: Under Treas. Reg. § 28.2801-4(b)(2) and § 28.2801-4(f)(1) (Example 1), the $19,000 annual exclusion is applied once per recipient across all covered expatriate donors in a calendar year, not per donor.
Foreign Tax Credit Offset (§ 2801(d))
Under § 2801(d), Section 2801 tax is reduced dollar-for-dollar by the amount of any gift tax or estate tax paid to a foreign country with respect to the covered gift or covered bequest. Under Treas. Reg. § 28.2801-4(e)(1), the credit is limited to foreign gift or estate taxes paid with respect to that particular transfer (excluding interest and penalties) and cannot exceed the Section 2801 tax liability attributable to that transfer.
Definition of Covered Expatriate (§ 877A(g)(1))
A transferor is a covered expatriate if they relinquished U.S. citizenship or terminated long-term lawful permanent resident status (green card holder for 8 of the preceding 15 tax years) after June 16, 2008, and meet any of three statutory tests:
-
Average Net Income Tax Liability Test (§ 877(a)(2)(A)): 5-year average annual net U.S. income tax liability exceeds indexed thresholds:
- 2025 Expatriations: $206,000 (Rev. Proc. 2024-40)
- 2026 Expatriations: $211,000 (Rev. Proc. 2025-32)
- Net Worth Test (§ 877(a)(2)(B)): Net worth of $2,000,000 or more on the expatriation date (not indexed for inflation).
- Tax Compliance Certification Test (§ 877(a)(2)(C)): Failure to certify 5-year federal tax compliance on Form 8854 under penalties of perjury.
3. Loss of Lifetime Exemption & Direct Scenario Comparison
Under Internal Revenue Code Section 2801, a gift or bequest from a covered expatriate to a U.S. citizen or resident is generally subject to a flat 40% tax rate on the amount exceeding the annual statutory exclusion ($19,000 for 2025 and 2026), unless a specific statutory exception applies under Section 2801(e) (such as transfers reported on timely gift tax returns, qualifying spousal transfers, or charitable transfers; see Section 4).
- Normal U.S. Gift Rules (Form 709): The donor reports and pays gift tax. The donor's unified credit absorbs the tax liability until exhausted; no tax is owed by the recipient.
- Covered Expatriate Rules (§ 2801 / Form 708): The tax burden shifts entirely to the U.S. recipient, who must file Form 708 and pay the flat 40% tax.
- No Unified Credit: Covered expatriates have $0 unified credit / $0 lifetime exemption to protect gifts to U.S. persons.
- Flat 40% Rate on Net Covered Transfers: Subject to applicable exceptions and foreign tax credits, net covered transfers exceeding the $19,000 annual exclusion face a flat 40% tax rate, payable with Form 708.
- Indefinite Window: The tax regime never expires; gifts made decades after expatriation still trigger Section 2801 tax.
Direct Scenario Comparison
| Tax Attribute | If Donor Remained U.S. Citizen / Resident | If Donor is a "Covered Expatriate" |
|---|---|---|
| Tax Rate | 0% (until lifetime exemption is exceeded) | Flat 40% on net transfers over annual exclusion |
| Who Files & Pays? | The Donor (Form 709) | The U.S. Recipient (Form 708) |
| 2026 Lifetime Exemption | $15,000,000 | $0 (Not applicable / Lost) |
| 2026 Annual Exclusion | $19,000 per donee | $19,000 per recipient (aggregate across all covered donors) |
4. Statutory Exceptions to Section 2801 Tax
Under IRC § 2801(e)(2)–(3) and Treas. Reg. § 28.2801-3(c), covered gifts and bequests specifically exclude the following transfers:
- Transfers Reported on Timely Filed Form 709 Property shown on a timely filed U.S. Gift Tax Return (Form 709) by the covered expatriate, provided the transfer is subject to U.S. gift tax under Chapter 12 (e.g., transfers of U.S.-situs real estate or tangible personal property).
- Transfers Included in Timely Filed Form 706 Gross Estate Property included in the covered expatriate's U.S. gross estate and shown on a timely filed U.S. Estate Tax Return (Form 706 or Form 706-NA).
- Qualified Spousal Transfers Transfers to a U.S. citizen spouse that would qualify for the marital deduction under IRC § 2056 (estate tax) or § 2523 (gift tax).
- Qualified Charitable Transfers Transfers to qualified tax-exempt charitable organizations under IRC § 2055 (estate tax) or § 2522 (gift tax).
- Qualified Disclaimers Property transferred pursuant to a qualified disclaimer under IRC § 2518.
5. Special Rules for Foreign & Domestic Trusts (§ 2801(e)(4))
Section 2801 establishes three distinct operational regimes depending on the trust's classification:
Domestic Trusts (§ 2801(e)(4)(A))
A domestic trust receiving a covered gift or bequest is treated as a U.S. citizen. The trust must file Form 708 and pay the 40% tax directly upon receipt.
Non-Electing Foreign Trusts (§ 2801(e)(4)(B)(i)–(ii))
Tax is deferred until a distribution (of income or principal) attributable to covered gifts/bequests is made to a U.S. recipient. The recipient pays Section 2801 tax upon distribution, determined by the trust's Section 2801 ratio (Treas. Reg. § 28.2801-5(c)). If the distribution is included in the beneficiary's gross income, an IRC § 164 income tax deduction is allowed for the Section 2801 tax paid.
Electing Foreign Trusts (§ 2801(e)(4)(B)(iii) & Treas. Reg. § 28.2801-5(d))
A foreign trust may elect to be treated as a domestic trust solely for Section 2801 purposes. The electing trust pays Section 2801 tax upfront on covered gifts/bequests received.
U.S. Agent Designation via Form 2848: Under Treas. Reg. § 28.2801-5(d)(3)(iv)(A), the trustee of an electing foreign trust must designate and authorize a U.S. person to act as an agent for Section 2801 compliance. The final regulations explicitly specify that "the designation and authorization must be made on Form 2848, Power of Attorney and Declaration of Representative." Valid elections protect U.S. beneficiaries from paying Section 2801 tax on subsequent distributions.
6. Form 708 Filing Deadlines & Procedural Rules
Form 708 is due on or before the 15th day of the eighteenth calendar month following the close of the calendar year in which the covered transfer was received:
- Calendar Year 2025 Receipts: Due on or before June 15, 2027
- Calendar Year 2026 Receipts: Due on or before June 15, 2028
Under Treas. Reg. § 28.6071-1(a)(1), if a covered bequest is received on a date other than the decedent's date of death (such as after delayed probate administration), the due date is the later of:
- The 15th day of the eighteenth calendar month following the close of the calendar year in which the covered expatriate died; or
- The 15th day of the sixth month (June 15) of the calendar year following the close of the calendar year in which the covered bequest was received.
Example (from Form 708 Instructions): If a covered expatriate dies in 2025 and a beneficiary receives a bequest under the will in 2026, Form 708 is due June 15, 2027. If the bequest is received in 2027, Form 708 is due June 15, 2028.
7. Determining "Covered" Status, § 6103 Requests & Protective Filings
Ascertaining whether an expatriate transferor is legally a "covered expatriate" is the most formidable practical hurdle for practitioners. Transferors often reside abroad and may hesitate to disclose confidential tax returns and net worth calculations.
- Form 8854: The expatriate's signed Initial and Annual Expatriation Statement certifying 5-year tax compliance and reporting net worth.
- Certificate of Loss of Nationality (CLN, Form DS-4083) or Form I-407 (green card abandonment).
- 5-Year Tax Returns: Forms 1040/1040-NR establishing average tax liability.
Under Treas. Reg. § 28.2801-7(b)(1), the IRS may disclose limited return information to a recipient to assist in determining covered status, pursuant to IRS procedures published in the Internal Revenue Bulletin.
Under Treas. Reg. § 28.2801-7(b)(2), unless a living expatriate donor authorizes disclosure of their relevant return information to the U.S. recipient, there is a rebuttable presumption that the donor is a covered expatriate and that the transfer is a covered gift.
If a living donor refuses to cooperate, the recipient bears the burden of overcoming this presumption with independent, verifiable third-party documentation. Failing that, the transfer is treated as covered, and Section 2801 tax may be assessed.
A taxpayer who reasonably concludes a transfer is not subject to Section 2801 may file a protective Form 708 to start the 3-year statute of limitations on assessment under IRC § 6501. Under the safe harbor in Treas. Reg. § 28.6011-1(b), the return must include:
- Form 708 completed with all otherwise required transfer details;
- A signed affidavit under penalties of perjury setting forth the factual basis for concluding the donor is not covered, including all due diligence efforts undertaken;
- A copy of any disclosure information received from the IRS under § 28.2801-7(b)(1); and
- A completed copy of Form 3520 Part IV (for gifts and bequests) or Form 3520 Part III (for trust distributions), if applicable.
8. Form 708 Interaction with Form 3520 (Part IV & Part III)
Filing Form 708 does not relieve a taxpayer of separate reporting obligations under Form 3520. Form 3520 is an informational disclosure under IRC §§ 6039F and 6048, while Form 708 is a transfer tax return under IRC § 2801.
Treas. Reg. § 28.2801-6(c)(3) explicitly provides that filing Form 708 does not relieve a U.S. citizen or resident from penalties under:
- IRC § 6039F(c): Penalty of 5% per month (up to 25% of the gross gift) for failure to timely file Form 3520 Part IV, plus IRS discretion to determine tax consequences.
- IRC § 6677(a): Penalty of the greater of $10,000 or 35% of the gross foreign trust distribution for failure to report on Form 3520 Part III.
Reporting Obligation Matrix
| Transfer Type | Amount | Form 708 Required? | Form 3520 Part IV Required? |
|---|---|---|---|
| Covered Expatriate Gift | ≤ $19,000 | No (Under annual exclusion) | No (Under $100k threshold) |
| Covered Expatriate Gift | $19,001 – $100,000 | Yes (40% tax on excess) | No (Under $100k threshold) |
| Non-Covered Foreign Gift | > $100,000 (single or related donors) | No (Donor not covered) | Yes (Informational return) |
| Covered Expatriate Gift | > $100,000 (single or related donors) | Yes (40% tax on excess) | Yes (Both returns required) |
Related Donor Aggregation: Under Notice 97-34 and § 6039F, gifts from related foreign persons (under IRC § 267(b) or § 707(b)(1), including family members under § 267(c)(4)) must be aggregated when determining whether the $100,000 threshold is exceeded.
9. Indirect Transfers via Foreign Entities & Nominees
Section 2801 reaches property received directly or indirectly from a covered expatriate (IRC § 2801(a)).
- Entity Look-Through Rule (Treas. Reg. § 28.2801-2(i)): Property transferred to a U.S. person through a foreign corporation, partnership, or other entity is treated as an indirect covered transfer in proportion to the covered expatriate's equity interest.
- Intermediaries & Conduit Structures: If a covered expatriate transfers funds to a non-covered foreign third party who subsequently conveys those funds to a U.S. person pursuant to an arrangement, the transfer is treated as directly received from the covered expatriate.
10. Payment Mechanics, Penalties & Statute of Limitations
Under the official Form 708 Instructions, original paper returns are mailed to:
U.S. Postal Service:
Department of the Treasury
Internal Revenue Service
Kansas City, MO 64999
Private Delivery Service (PDS):
Internal Revenue Service
333 W. Pershing Road
Kansas City, MO 64108
- Electronic Federal Tax Payment System (EFTPS): The IRS recommends paying electronically through EFTPS (EFTPS.gov).
- Same-Day Wire: Electronic submission via financial institution wire using the IRS Same-Day Wire worksheet.
- Check or Money Order: Payable to “United States Treasury,” noting the recipient’s TIN and “Form 708” on the check.
Although IRC § 6662(g) statutorily defines valuation understatements with reference to estate and gift taxes under Chapters 11 and 12, Treas. Reg. § 28.2801-6(d)(1) explicitly incorporates and extends the § 6662 accuracy penalty to Section 2801:
- Substantial Valuation Understatement (Treas. Reg. § 28.2801-6(d)(1)(i) & IRC § 6662(g)): 20% accuracy penalty if reported value is 65% or less of correct value.
- Gross Valuation Misstatement (Treas. Reg. § 28.2801-6(d)(1)(ii) & IRC § 6662(h)): 40% accuracy penalty if reported value is 40% or less of correct value.
- Appraiser Penalties (Treas. Reg. § 28.2801-6(d)(2) & IRC § 6695A): Applied to appraisers preparing incorrect valuations.
- Failure to File & Pay (Treas. Reg. § 28.2801-6(d)(3) & IRC § 6651): 5% per month for late filing (up to 25%) and 0.5% per month for late payment (up to 25%).
- Return Preparer Penalties (IRC § 6694 & Treas. Reg. § 28.6694-1): Applied to signing tax return preparers.
11. Worked Numerical Example
The following example illustrates the application of the annual exclusion across multiple covered donors, the flat 40% tax rate, the foreign gift tax credit offset, and the interaction with Form 3520 Part IV.
Scenario Facts (Tax Year 2025)
During Calendar Year 2025, Taxpayer R (a U.S. citizen) receives two transfers:
- Transfer 1 (March 15, 2025): $70,000 cash gift from Father (a covered expatriate).
- Transfer 2 (October 20, 2025): $45,000 worth of shares in a German AG from Aunt (Father's sister, also a covered expatriate). On this transfer, German gift tax (Schenkungsteuer) of $10,000 was paid directly to the German tax authorities (Finanzamt).
Under IRC § 6039F and Notice 97-34, gifts from related foreign persons must be aggregated. Under IRC § 267(c)(4), siblings are related persons. Because Father and Aunt are brother and sister, their gifts must be aggregated: $70,000 + $45,000 = $115,000. Because the aggregate exceeds $100,000, Taxpayer R is required to file Form 3520 Part IV to report both gifts. Form 3520 is due with Taxpayer R's 2025 income tax return on April 15, 2026 (or October 15, 2026 with extension Form 4868).
| Step | Description | Calculation | Amount |
|---|---|---|---|
| 1 | Covered Gift 1 (Father) | Cash received | $70,000 |
| 2 | Covered Gift 2 (Aunt) | German shares FMV | $45,000 |
| 3 | Total Gross Covered Transfers | $70,000 + $45,000 | $115,000 |
| 4 | Annual Statutory Exclusion (§ 2801(c)) | Indexed 2025 exclusion (applied once per Treas. Reg. § 28.2801-4(b)(2)) | -$19,000 |
| 5 | Net Taxable Covered Transfers | $115,000 - $19,000 | $96,000 |
| 6 | Gross Section 2801 Tax (40%) | $96,000 × 40% | $38,400 |
| 7 | Foreign Tax Credit Offset (§ 2801(d)) | German gift tax paid on Transfer 2 (limited to tax on this gift per Treas. Reg. § 28.2801-4(e)(1)) | -$10,000 |
| 8 | Net Section 2801 Tax Due on Form 708 | $38,400 - $10,000 | $28,400 |
Filing Deadline: Form 708 and the $28,400 tax payment for these 2025 receipts are due on or before June 15, 2027 (or December 15, 2027 if extended via Form 7004).
12. Frequently Asked Questions (FAQ)
Who is required to file Form 708?
Form 708 must be filed by any U.S. citizen, U.S. resident domiciliary, domestic trust, or electing foreign trust that receives covered gifts or covered bequests during a calendar year totaling more than the annual statutory exclusion ($19,000 for 2025 and 2026).
When is Form 708 due?
Under the 18-month general rule (Treas. Reg. § 28.6071-1(a)(1)), Form 708 is due on or before the 15th day of the eighteenth calendar month following the close of the calendar year of receipt. For 2025 receipts, Form 708 is due June 15, 2027 (or December 15, 2027 with Form 7004 extension). For 2026 receipts, Form 708 is due June 15, 2028.
Can Form 708 be filed electronically (e-filed)?
No. Form 708 is currently a paper-filed return that must be mailed to the Internal Revenue Service Center in Kansas City, Missouri.
Is there a lifetime unified credit or exemption for covered expatriates under Section 2801?
No. Covered expatriates have $0 unified credit and no lifetime exemption available to shield gifts or bequests to U.S. beneficiaries. Net covered transfers exceeding the annual exclusion ($19,000) are taxed at a flat 40% rate, subject to applicable exceptions and foreign tax credits.
If a client received gifts from an expatriated relative before 2025, is Form 708 required?
No. Under TD 10027, the Section 2801 final regulations apply strictly to covered gifts and covered bequests received on or after January 1, 2025. Transfers received prior to 2025 do not trigger Form 708 reporting or Section 2801 tax liability (though pre-2025 foreign gifts exceeding $100,000 required Form 3520 Part IV under § 6039F).
Does filing Form 708 relieve the recipient from filing Form 3520 Part IV?
No. Form 708 and Form 3520 are separate statutory filings. Under Treas. Reg. § 28.2801-6(c)(1) and (3), filing Form 708 does not relieve a U.S. person from reporting foreign gifts over $100,000 on Form 3520 Part IV under IRC § 6039F, nor does it protect against the 25% failure-to-file penalty under § 6039F(c).
What happens if a living donor refuses to disclose their expatriation tax records?
Under Treas. Reg. § 28.2801-7(b)(2), if a living expatriate donor refuses or fails to authorize disclosure of their return information under IRC § 6103, there is a rebuttable presumption that the donor is a covered expatriate and that the transfer is a covered gift subject to Section 2801 tax.
Prepare Form 708 with Agena Software
Under the IRS 18-month deadline rule, the first Form 708 returns (for Calendar Year 2025 receipts) are due on June 15, 2027 (or December 15, 2027 with extension Form 7004). Returns for Calendar Year 2026 receipts are due on June 15, 2028.
The Form 708 workspace prepares the return for individuals and trusts, with the section 2801 ratio for foreign trust distributions, protective returns, and the Form 7004 extension. Start from an existing Form 3520. $199 per recipient and calendar year.