Understanding the New IRC Section 2801 Regulations: FAQ and What You Need to Know
Final regulations for Internal Revenue Code (IRC) Section 2801 may have important implications for US persons receiving gifts or inheritances from individuals who have expatriated from the United States.
Understanding who qualifies as a covered expatriate, what gifts and inheritances are covered, and who is liable for the 40% tax is crucial for compliance starting in 2025.
What is IRC Section 2801?
The final regulations under Section 2801 create a new layer of tax responsibility for US recipients of gifts and inheritances from certain expatriates.
The United States generally does not tax its citizens or residents on the receipt of gifts or inheritances and instead these taxes are assessed on the individual making the gift or the estate distributing to a beneficiary. Historically, these rules have also applied to gifts and inheritances that US persons receive from non-US persons.
This changed when the Heroes Earnings Assistance and Relief Tax Act of 2008 introduced Section 2801, under which the IRS recently published final regulations on January 14, 2025. These final regulations apply to gifts or inheritances received on or after January 1, 2025.
Section 2801 imposes a tax on US citizens and residents who receive gifts or inheritances from covered expatriates.
The Section 2801 tax is separate from the exit tax that the expatriate may have paid upon leaving the country.
Who is a Covered Expatriate?
A covered expatriate is a US citizen who has relinquished citizenship, or a long-term green card holder—one who held a green card for at least 8 of the last 15 years—who subsequently surrendered it, and who met any of the following criteria at expatriation:
- Had a net worth of $2 million
- Had a net average annual tax liability over the applicable threshold ($206,000 for 2025) for the five years preceding expatriation
- Failed to certify compliance with all US federal tax obligations for the five years before expatriation
What Gifts and Inheritances are Covered Under Section 2801?
Section 2801 covers gifts or inheritances received by US persons after June 17, 2008, directly from a covered expatriate or the covered expatriate’s estate or through domestic or foreign trusts.
It applies regardless of where the property is located or when it was acquired.
For inheritances, the property received must be includable in the expatriate’s gross estate for federal estate tax purposes assuming the expatriate had been a US citizen at death.
Who Pays the Tax Under Section 2801?
Unlike the exit tax, which is paid by the expatriate, the Section 2801 tax is paid by the US recipient.
This includes:
- US citizens and residents
- Domestic trusts receiving gifts or inheritances covered by Section 2801
- Foreign trusts that elect to be treated as domestic trusts for Section 2801 purposes
US persons who receive distributions from foreign trusts that did not elect to be treated as domestic trusts, but only to the extent those distributions come from gifts or inheritances covered by Section 2801
What Are the Section 2801 Filing and Reporting Requirements?
Recipients must report gifts and inheritances from covered expatriates on IRS Form 708, which is currently in draft form only and has not been released for use. It’s estimated that the final form will be released mid-2026.
Form 708 must be filed on or before the 15th day of the 18th calendar month after the end of the year in which the covered gift or bequest was received. The due date for the first Form 708 will be due on July 15, 2027, for gifts and bequests received during the 2025 calendar year.
Additionally, Form 3520 may be required to report gifts or inheritances from foreign persons or estates. This form is required if the total value of gifts or inheritances received from a non-US person is more than $100,000 in a calendar year, or if a distribution is received from a foreign trust, regardless of the amount.
How is the Tax Calculated Under Section 2801?
- Add up the fair market value of all gifts and inheritances that are covered by Section 2801 and received during the calendar year
- Subtract the annual gift tax exclusion amount ($19,000 in 2025)
- Multiply the net amount by the highest estate tax rate in effect for that year (currently 40%)
- Reduce the tax by any foreign gift or estate tax credit allowed for taxes paid to a foreign country on the same gift or inheritance
What’s Excluded Under Section 2801?
The following transfers are excluded from the section 2801 tax:
- Transfers to the covered expatriate’s spouse, as a marital deduction would have applied had the expatriate remained a US citizen
- Transfers reported on a timely filed US gift or estate tax return.
- Any transfer that does not exceed the annual gift tax exclusion amount
Attempting to avoid section 2801 tax by temporarily returning to the US as a resident after expatriation does not exempt the individual from these rules.
We’re Here to Help
If you have received a gift or inheritance from a non-U.S. person or expect to receive one in the future, please consult with your firm professional.