The IRS Revives a 40% Expatriation Tax with Form 708

For years, Section 2801 sat in the Code like an unplugged smoke detector. Everyone knew it existed. No one heard it chirp. Then, in January 2025, the IRS finalized regulations, and Form 708 finally landed. If you advise globally mobile families or sit inside a U.S. firm with cross-border clients, this one matters more than the headlines suggest. It does not hit the expatriate. It hits the kid, the trust beneficiary, or the unsuspecting heir who thought an inheritance was clean. This is not a new law. It is a newly alive law.

Why did the IRS dust off a 2008 statute now?

Section 2801 came out of the HEART Act in 2008, alongside the exit tax rules in Section 877A. Congress had a clear idea. If someone walks away from the U.S. tax system, the IRS still wants a bite when their wealth circles back to U.S. persons. What changed is enforcement. Final regulations dropped in January 2025. Form 708 followed with a December 2025 revision date. Transfers received on or after January 1, 2025, are now squarely in scope. The long pause is over. Expatriations have climbed steadily over the last decade. Combine that with aging parents, trust distributions, and estate settlements, and the IRS is staring at real money. Forty percent money.

Who exactly is a “covered expatriate?”

A covered expatriate is not just someone rich at the moment they renounce. The status attaches if, at expatriation, any one of three test trips:

• Net worth over $2 million.
• Average annual U.S. income tax liability over the indexed threshold is roughly $206,000 for 2025.
• Failure to certify five years of full U.S. tax compliance on Form 8854.

That third one causes most of the trouble. Miss a filing. Botch an information return. Forget Form 8938. Suddenly, the label applies. Here is the kicker that trips up families. Once someone is a covered expatriate, they stay that way for Section 2801 purposes. It does not matter when the assets were earned. Pre-expatriation, post-expatriation, offshore, onshore, cash, stock, real estate, all count.

What triggers the 40% Tax?

The tax applies when a U.S. person receives either a covered gift or a covered bequest.

• Covered gifts include lifetime transfers of money or property from a covered expatriate, whether direct or indirect.
• Covered bequests apply at death through a will, estate, or trust. Location does not matter. Neither does the timing of asset acquisition.
• Unlike a regular gift or estate tax, the donor pays nothing. The estate pays nothing. The U.S. recipient is on the hook.

There is a single annual exclusion of $19,000 for 2025 and 2026, applied once per year across all covered expatriates. There is no lifetime exemption. Once you blow past that number, the math is simple and ugly. Fair market value times 40%, reduced only by limited credits for foreign gift or estate tax. If that feels punitive, that is because it is.

What about trust, and why do they get messy fast?

Trusts are where Section 2801 moves from theory to real-world headache. Distributions from domestic trusts and electing foreign trusts can trigger the tax. For foreign trusts, the regulations introduce the Section 2801 ratio. You must determine how much of the trust is attributable to covered transfers versus other contributions. Every new contribution forces a recalculation. If records are incomplete, the IRS presumes the entire distribution is taxable. That presumption alone should make trustees sweat. In practice, many beneficiaries will not have clean contribution histories going back to 2008. That puts them deep in the weeds, fast.

How does Form 708 change compliance for U.S. recipients?

• Form 708 is an annual return. The due date is the 15th day of the 18th month after the calendar year of receipt. A 2025 transfer lands a June or July 2027 filing deadline, depending on how the calendar shakes out.
• Extensions apply to filing, not payment. Penalties under Section 6651 apply for late filing or late payment. Records must be kept indefinitely.
• One quiet but important detail is the burden of proof. The U.S. recipient must prove the donor was not a covered expatriate. If they cannot, the IRS assumes the transfer is covered.

That is why protective filings matter. Filing Form 708 with zero tax, supported by a sworn affidavit and documented due diligence, starts the statute of limitations. Skip that step, and the exposure stays open.

Why is this catching families off guard

Picture a U.S. CPA firm with a client whose parent moved back to Canada twenty years ago. The parent held a green card long enough to qualify as a long-term resident. They never filed Form I 407. They never certified compliance. At death, the child inherits Canadian assets that were already taxed under Canadian rules. From the child’s perspective, the check clears. From the IRS perspective, the transfer just triggered a 40 percent tax. That scenario is not rare. It is showing up more often, and not just with Canada. Europe, Asia, and the Middle East all apply.

What should firms and advisors be watching right now?

• First, intake procedures need updating. Asking whether a gift or inheritance came from a former U.S. person is no longer optional.
• Second, trust reviews matter. Beneficiaries need contribution histories. Trustees need valuation discipline. Everyone needs documentation.
• Third, expatriation planning needs to move earlier. Gifting before expatriation can use the lifetime exemption. Charitable transfers can reduce exposure. Domestic trust elections can change outcomes.
• Finally, expect coordination gaps. Form 3520 still does not flag covered expatriate status. That omission means Section 2801 issues can slip through unless someone is paying attention.

Form 708 did not create a new tax. It turned on the lights for one that had been sitting quietly for seventeen years. For U.S. recipients, this is not academic. It is cash out the door. For firms, it is a compliance issue that cuts across individual tax, trusts, estates, and cross-border planning. If your client hears the word inheritance and relaxes, that is your cue to lean in and ask better questions.