The Covered Expatriate Gift Tax, IRC Sec. 2801, and (At Last!) Form 708

Reminding us all that time is merely a construct: Eighteen years after its original enactment in 2008, IRC Sec. 2801 finally has a corresponding IRS Form: Form 708. The IRS released this long-awaited form and its accompanying instructions in January 2026, effective for transfers from a “covered expatriate” received on or after January 1, 2025.

What Is IRC Sec. 2801?

Congress intended for IRC Sec. 2801 to address a gap in U.S. transfer tax law. When individuals expatriate from the United States, they generally become nonresident aliens for tax purposes. As nonresident aliens, they can make gifts or leave bequests to U.S. persons without triggering U.S. gift or estate tax on assets located in foreign countries. IRC Sect. 2801 closes this loophole by shifting the tax and reporting burden to the U.S. recipient.

IRC Sec. 2801 became law in 2008 and imposes a tax on U.S. citizens and residents who receive gifts or bequests from covered expatriates. Despite its enactment, the section could not be enforced until the IRS promulgated a form to report the tax. Unlike traditional gift or estate taxes, which are paid by the donor or estate, IRC Sec. 2801 tax is paid by the recipient.

IRC Sec. 2801 only applies to gifts from a covered expatriate to a U.S. person. A covered expatriate is a U.S. citizen who has relinquished citizenship or a green card holder who has held a green card for at least 8 of the last fifteen years who surrendered the green card, and who met any of the following criteria at the time of expatriation:

• Net worth of $2 million or more,
• Average annual net income tax liability exceeding a specified threshold ($206,000 for 2025), or
• Failed to file the Form 8854 Expatriation Statement or otherwise certify compliance with all U.S. federal tax obligations for the five years preceding expatriation

Expatriates that do not qualify as "covered" are not subject to IRC Sec. 2801, meaning their gifts and bequests to U.S. persons remain tax-free to the recipient.

Tax Calculation and Reporting

Form 708 is filed by the U.S. citizen or resident who receives a “covered gift or bequest” from a covered expatriate, as defined above. The tax rate is 40% of the fair market value of the gift or bequest when it is made, paid by the recipient.

The annual gift exclusion does apply to the IRC Sec. 2801 tax. Covered gifts and bequests are taxable only to the extent they exceed the annual gift tax exclusion amount ($19,000 for 2025 and 2026). Additionally, a foreign tax credit is available if foreign gift or estate tax was paid on the transfer by the covered expatriate.

Certain transfers are excluded from IRC Sec. 2801 entirely. These include transfers that would qualify for a marital or charitable deduction if the expatriate were still a U.S. person, and transfers that were reported on a timely filed U.S. gift or estate tax return by the covered individual before expatriation.

Recipients must file Form 708 and pay any associated tax owed by the 15th day of the 18th month following the end of the calendar year in which the gift or bequest was received. An automatic six-month extension is available by filing Form 7004, though the extension does not extend the time to pay any tax due. Accordingly, transfers made in 2025 must be reported in 2027. To illustrate: Assume a covered expatriate made a covered gift to a U.S. citizen on March 5, 2025. The deadline to file and pay would be July 15, 2027. If an automatic extension applies, the filing deadline will be extended to January 15, 2028.

Failure to follow IRC Sec. 2801 may result in significant penalties. A failure to file penalty can be assessed for noncompliance, equal to 5% of the unpaid tax per month, up to a maximum of 25%. A failure to pay penalty of 0.5% per month, also capped at 25%, is also due on any unremitted tax. These two penalties may be assessed in tandem. Additionally, taxpayers face potential accuracy-related penalties under IRC Sec. 6662 and valuation misstatement penalties under IRC Sec. 6695.

Trust Complications

A common estate planning vehicle is the use of domestic trusts, both revocable and irrevocable, to transfer assets. IRC Sec. 2801 regulations contain specific provisions for covered gifts made to trusts. When a covered expatriate makes a gift to a U.S. trust, the trust generally bears responsibility for paying the IRC Sec. 2801 tax. However, if the gift is made to a foreign trust that does not elect to be treated as a domestic trust, the gift is not taxable on transfer. Instead, any U.S. beneficiaries of the trust will incur the tax liability when they receive distributions, potentially years after the initial transfer.

Basis Considerations

Payment of the covered gift tax does not increase the recipient's income tax basis in the transferred property. If the recipient later disposes of the covered property, capital gains tax applies to the appreciation in value regardless of the IRC Sec. 2801 tax paid. This essentially causes a double-taxation issue, particularly for highly appreciated assets, that the regulations have left unaddressed for now.

Other Reporting Requirements

Form 708 is a separate filing requirement from any international informational returns. Recipients are still required to file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) disclosing any gift or bequest from a foreign person. With Form 3520 carrying a heavy penalty for non-compliance (up to 35% of the value of the gift), the Form 708 penalties, and the 40% tax itself, unwary recipients could end up owing more than the gift was worth.

Indirect Transfers

IRC Sec. 2801 is not limited to direct gifts – indirect transfers are included as well. The regulations broadly include property acquired through ownership interests in corporations or other entities, through powers of appointment, or through debt satisfaction as covered gifts or bequests. Even making mortgage payments or funding of controlled entities on another’s behalf might trigger the tax.

Treaty Concerns

Whether estate and gift tax treaties apply to the IRC Sec. 2801 tax remains unaddressed as well. While most treaties contain language covering "taxes of a substantially similar character," the Section 2801 tax is imposed on the recipient rather than the donor. While a foreign tax credit is allowed when the covered expatriate is the payor of the tax, it is not clear whether treaty benefits may be claimed in the same circumstances.

With the first filing deadline in 2027, taxpayers should pay attention if they have received, or anticipate receiving, any covered gifts or bequests. Further, any individuals who have expatriated or turned in their green card after eight years of U.S. residence should evaluate whether they are deemed “covered expatriates.” Reach out to our experts below to discuss any reporting or planning concerns today.