The IRS has finalized regulations (T.D. 10027) outlining tax obligations under Section 2801 of the Internal Revenue Code, which applies to U.S. citizens, residents, and certain trusts that receive gifts or bequests from "covered expatriates." Released on January 10, 2025, these regulations provide comprehensive guidance on calculating, reporting, and paying the tax using Form 708, the United States Return of Tax for Gifts and Bequests Received from Covered Expatriates. These regulations build upon the proposed rules issued in 2015 and implement provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (P.L. 110-245).

Section 2801 imposes a tax at the highest estate or gift tax rate, currently 40%, on gifts and bequests from covered expatriates that exceed the inflation-adjusted annual exclusion, which is $18,000 for 2024. A covered gift includes property acquired directly or indirectly from a covered expatriate, while a covered bequest encompasses property acquired upon the death of a covered expatriate that would have been includible in their gross estate if they were a U.S. citizen or resident at the time of death. The term "covered expatriate" applies to individuals who expatriated on or after June 17, 2008, and, as of the expatriation date, meet at least one of the following criteria: an average annual net income tax liability exceeding $124,000 (indexed for inflation), a net worth of $2 million or more, or failure to certify compliance with all U.S. tax obligations for the previous five years.

Under these rules, U.S. recipients must report covered gifts and bequests on Form 708 for the calendar year in which they are received. The tax liability is determined by reducing the value of the transfers by the applicable annual exclusion and applying credits for any foreign gift or estate taxes paid.

The regulations include provisions that take effect on January 1, 2025, with others becoming applicable on January 14, 2025, upon publication in the Federal Register. Taxpayers affected by these rules should consult with a tax professional to fully understand their obligations under Section 2801 and ensure timely compliance. Here is a link to the actual regulations 2025-00284.pdf