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IRS Drops Form 708: 40% Tax, Gifts & Bequests, “Covered Expatriates”
By Virginia La Torre Jeker, J.D.,
Contributor.
Admitted NY Bar and US Tax Court, covers US international tax law.
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Jan 17, 2026, 12:01am ESTJan 17, 2026, 12:06pm EST
IRS new Form 708 enforces a 40% transfer tax on U.S. recipients of covered gifts and bequests from former citizens or long-term residents who expatriated. This article deep dives key rules, exclusions, trust implications, and more. Essential reading for cross-border estate planning in 2026.... More
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The Internal Revenue Service has released the final version of Form 708, titled “United States Return of Tax for Gifts and Bequests Received from Covered Expatriates,” (revision dated December 2025) along with detailed draft instructions (revision dated December 2025). As of today’s publication, the accompanying instructions remain in draft form available only as a draft PDF on the IRS Draft Tax Forms page, with no final instructions published yet. This means taxpayers can access the form for reporting covered gifts and bequests received on or after January 1, 2025, but should monitor IRS updates for the finalized instructions.
Form 708 is specifically designed to enforce a special 40% (current rate) transfer tax under Section 2801 of the Internal Revenue Code. The tax targets only "covered gifts" and "covered bequests" received by U.S. persons from "covered expatriates." "Covered expatriates” are individuals who renounced U.S. citizenship or long-term green card status after June 16, 2008, and who met certain high-net-worth (USD2 million) or tax-liability thresholds at the time of expatriation, or who failed to certify full U.S. tax compliance for the 5-year period prior to expatriating.
While the law has technically been on the books since 2008 (as part of the HEART Act), the IRS has been silent for quite some time. Proposed regulations issued in 2015 gave us some clues but were met with continued radio silence until the IRS issued final regulations on January 14, 2025 (these final regulations are more simply explained here). They explicitly state that the Section 2801 regulations apply to covered gifts and covered bequests received on or after January 1, 2025. Unlike standard U.S. gift or estate taxes (which the donor or estate typically pays), the full 40% liability here falls on the U.S. recipient (whether an individual, domestic trust, or certain foreign trusts) creating a potential unexpected bill for U.S. recipients of gifts or inheritances from former Americans and long-term residents.
Expatriation: What Are "Covered Gifts" and "Covered Bequests"?These transfers are subject to the Section 2801 tax and Form 708 reporting:
“Covered gifts” encompass any money or property (tangible or intangible, located anywhere) transferred during the covered expatriate's lifetime directly to a U.S. recipient (e.g., cash, real estate, stocks, artwork, or other assets), or indirectly to a U.S. recipient (e.g., through a foreign trust distribution attributable to the expatriate's contributions).
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“Covered bequests” are similar. These are transfers of money or property occurring at the covered expatriate's death, such as inheritances via will, trust, or estate distribution.
The transfer tax applies to transfers by the covered expatriate of worldwide property, regardless of when the expatriate acquired it, whether before or after expatriation.
Here’s an example of the harsh reality of the transfer tax:
Carlos, a Venezuelan-American expatriated in 2010. At the time, his net worth was well under $2 million, his average annual U.S. tax liability was only $50,000 (far below the threshold), but he had failed to file Form 8938 reporting certain foreign financial assets. This tax noncompliance made him a "covered expatriate." Fast-forward to 2025: Carlos is now a multi-millionaire tech entrepreneur living in Dubai. In 2026, he gifts $5 million in cash and stock to his U.S. citizen daughter. Because he is a covered expatriate, the entire $5 million qualifies as a “covered gift”, regardless of the fact that he acquired every dollar of it after he expatriated. His daughter owes 40% tax on the amount exceeding the $19,000 annual exclusion (roughly $1.992 million in tax). Moral: The Section 2801 transfer tax is forever. A lapse in tax compliance can haunt worldwide transfers for the rest of the expatriate’s life and that can burden his U.S. loved ones. The tax applies to transfers of worldwide property, no matter when the expatriate acquired it, before or after renunciation. Tax compliance is not optional. Due to the significant tax impact, a thorough review of the tax returns and the entire tax situation should be done by an independent tax professional covering the 5-year period prior to expatriation.
Important Exclusions: Transfers That Are NOT CoveredNot every gift or inheritance from an expatriate triggers the tax. Key exclusions include:
- Transfers to a U.S. citizen and with certain limitations transfers to a non-U.S. citizen spouse;
- Transfers to qualifying U.S. charities;
- Transfers properly disclaimed under qualified U.S. disclaimer rules;
- Any amount already timely reported (and taxed, if applicable) on the expatriate's U.S. gift tax return (Form 709) or the expatriate's estate tax return (Form 706 or 706-NA).
In addition to these categorical exclusions, there is an annual exclusion amount which is currently $19,000 for calendar years 2025 and 2026 (inflation-adjusted thereafter). This exclusion amount applies to the aggregate total of all covered gifts and covered bequests received by the U.S. recipient from all covered expatriates in a single calendar year. This means the $19,000 is subtracted only once from the combined value of all such transfers in the year, regardless of how many covered expatriates are involved or how the amounts are divided among them. If the total fair market value of all covered gifts and covered bequests received during the year does not exceed $19,000, no Section 2801 tax is due and, in most cases, no Form 708 filing is required (with limited exceptions for certain trusts).
Who Must File IRS Form 708?The status of U.S. recipients is determined by” domicile” rules for U.S. gift and estate tax purposes, and not U.S. income tax rules. U.S. recipients must file if they receive covered items exceeding the annual exclusion. This includes a U.S. citizen or domiciliary; domestic trusts; foreign trusts that elect domestic treatment or migrate to domestic status. Foreign trusts may elect domestic treatment to shift liability, but various requirements must be satisfied including submission of the trust instrument, U.S. agent designation (via Form 2848), and prior distribution reporting.
The Burden Of Proof And “Protective” Form 708 FilingsA significant challenge for U.S. recipients involves the burden of proof. This rests squarely on the U.S. recipient to demonstrate that a gift, bequest, or trust distribution was not from a covered expatriate. If the IRS questions the status of the donor or decedent, the recipient must provide sufficient evidence (for example, the expatriate’s Form 8854 certification, expatriation records, or other documentation) to rebut the presumption that the transfer is “covered”.
So-called “protective” filings for Form 708 are allowed. A protective filing can be very helpful to start the statute of limitations for the U.S. recipient to foreclose IRS challenges later, once the limitations period has expired. This requires submitting a complete Form 708 (reporting $0 tax liability), checking the protective filing box in Part I. It also requires attaching an affidavit signed under penalties of perjury explaining the specific information relied upon and the efforts made to determine the transfer is not covered along with any relevant supporting documents.
A valid protective filing starts the statute of limitations, provided the recipient had a reasonable basis for concluding the transfer was not “covered.” The regulations require documented reasonable efforts to obtain relevant details. An experienced U.S. tax professional should be consulted before submitting a protective return to ensure it meets IRS standards and effectively safeguards against later penalties or assessments.
Due Dates, Filing Logistics, PenaltiesForm 708 is an annual return, and the section 2801 transfer tax is paid on an annual basis for any calendar year during which a covered gift or covered bequest is received. The standard deadline is the 15th day of the 18th month after the calendar year of receipt (e.g., June 15, 2027, for 2025 receipts). Bequests may align with the expatriate's death year for potentially later deadlines. Certain trusts have a six-month post-migration window.
Extensions via Form 7004 apply to filing the Form, but not to payment of the tax. An automatic 6-month extension of time to file Form 708 applies if Form 7004 is filed on or before the due date for filing Form 708.
Late filing/payment incurs Section 6651 penalties (waivable for reasonable cause). Records must be kept indefinitely.
A Surprise!Surprisingly, IRS Form 3520's Part IV, which requires reporting of large gifts or bequests from foreign persons, does not currently include any specific question, checkbox, or prompt asking whether the donor (or decedent) was a former U.S. citizen, long-term green card holder, or covered expatriate under Section 2801. This omission creates a notable coordination gap that could help flag potential Section 2801 liabilities earlier, reduce unintentional non-compliance among those who are unaware of the rules.
Broader Implications Amid Rising ExpatriationsWith expatriations increasing, Form 708 underscores that renouncing U.S. status doesn't fully eliminate tax exposure for gifts and bequests to U.S. recipients. Pre-expatriation strategies to prevent “covered expatriate” status should definitely be explored. Records should be kept and explained to potential U.S. heirs or recipients to ensure they have the documentation to present to the IRS to prove the transfer did not come from a “covered expatriate.”
Reach me at vljeker@us-taxes.org
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