1. Executive Summary & Regulatory Background
With the publication of Treasury Decision 10027 (TD 10027), effective January 14, 2025, the U.S. Department of the Treasury and the Internal Revenue Service finalized long-anticipated regulations under Internal Revenue Code (IRC) Section 2801. To administer the section 2801 tax, the IRS officially released Form 708 (United States Return of Tax for Gifts and Bequests Received From Covered Expatriates) and its accompanying instructions.
IRC § 2801 imposes a federal tax on United States citizens, U.S. residents (determined by domicile), domestic trusts, and foreign trusts making a domestic trust election who receive "covered gifts" or "covered bequests" directly or indirectly from "covered expatriates."
Crucial Paradigm Shift: Under general U.S. gift tax rules (Form 709), tax liability is imposed on the donor. Under IRC § 2801, tax liability is shifted entirely onto the U.S. recipient.
View or download the official statutory code and IRS return forms directly from our 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 tax rate is equal to the product of the highest marginal federal estate tax rate in effect on the date of receipt (currently 40%) and the fair market value of the covered transfer.
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
Foreign Tax Credit Offset (§ 2801(d))
The 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.
Definition of Covered Expatriate (§ 877A(g)(1))
A transferor is a covered expatriate if they relinquished U.S. citizenship or terminated long-term green card status after June 16, 2008, and meet any of three statutory tests on their expatriation date:
- Average Net Income Tax Liability Test: 5-year average annual net income tax liability exceeds indexed thresholds ($206,000 for 2025; $211,000 for 2026).
- Net Worth Test: Net worth of $2,000,000 or more on the date of expatriation.
- Tax Compliance Certification Test: Failure to certify 5-year U.S. tax compliance on Form 8854 under penalties of perjury.
3. Loss of Lifetime Exemption & Direct Scenario Comparison
Under Internal Revenue Code Section 2801, any gift or bequest from a covered expatriate to a U.S. citizen or resident is hit with a 40% tax on the amount exceeding the $19,000 annual exclusion.
- Normal U.S. Gift Rules (Form 709): The donor reports and pays gift tax. They use their lifetime exemption first; no tax is owed until that exemption is exhausted.
- Covered Expatriate Rules (§ 2801 / Form 708): The tax burden is completely reversed. The U.S. recipient must pay the 40% tax and file IRS Form 708.
- No Unified Credit: Covered expatriates have $0 unified credit / $0 lifetime exemption to protect gifts to U.S. persons.
- Flat 40% Rate: Every dollar over the $19,000 annual exclusion faces an immediate 40% tax.
- 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) | 40% on amounts over annual exclusion |
| Who 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 recipient | $19,000 per recipient |
4. Statutory Exceptions to Section 2801 Tax
Under IRC § 2801(e)(2)–(3) and Treas. Reg. § 28.2801-3, covered gifts and bequests do not include:
- Transfers Subject to U.S. Gift or Estate Tax Property shown on a timely filed U.S. Gift Tax Return (Form 709) by the covered expatriate, or included in the covered expatriate's U.S. gross estate and shown on a timely filed Form 706.
- Spousal Transfers Transfers to a U.S. citizen spouse that would qualify for the marital deduction under IRC § 2056 or § 2523.
- Charitable Transfers Transfers to qualified tax-exempt charitable organizations under IRC § 2055 or § 2522.
4. Trust Rules under Section 2801(e)(4)
Section 2801 establishes distinct operational regimes for domestic trusts, non-electing foreign trusts, and electing foreign trusts:
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 (from income or principal) attributable to covered gifts/bequests is made to a U.S. recipient. The U.S. recipient pays Section 2801 tax upon distribution. 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))
A foreign trust may elect to be treated as a domestic trust solely for Section 2801 purposes. The trust pays Section 2801 tax upfront, designates a U.S. agent via Form 2848, and notifies permissible distributees. Valid elections shield U.S. beneficiaries from Section 2801 tax on subsequent trust distributions.
5. Form 708 Filing Deadlines & Procedural Rules
Unlike traditional annual returns due on April 15, Form 708 is due on or before the 15th day of the eighteenth month following the close of the calendar year in which the covered transfer was received.
- Tax Year 2025 Return (Gifts received in 2025): Due June 15, 2027
- Tax Year 2026 Return (Gifts received in 2026): Due June 15, 2028
Automatic Extension: Taxpayers can request an automatic 6-month extension by filing Form 7004 on or before the due date, extending a 2025 return deadline to December 15, 2027.
Form 708 Preparation Workspace Availability
Software support for preparing and generating IRS Form 708 returns will be available for the 2027 filing season (for returns due in April – October/December 2027, processing returns for tax years 2025 and 2026 under the IRS 18-month deadline rule).
Agena Software provides specialized tax return preparation software designed for cross-border informational and transfer tax disclosures.