What Is IRS Form 708 and Who Needs to File It?
Learn about IRS Form 708, its purpose, who must file, and key tax considerations for gifts from expatriates to ensure compliance with U.S. tax laws.
The U.S. tax system has specific rules for gifts and inheritances, particularly those from individuals who have renounced U.S. citizenship or residency. To monitor and potentially tax these transfers, the IRS requires certain recipients to file Form 708.
Understanding this form is crucial for those receiving large financial gifts or bequests from expatriates. Missing this requirement can lead to penalties, making it necessary to determine whether filing is required and what steps are involved.
Purpose of IRS Form 708
Form 708 tracks and taxes wealth transfers from individuals who have relinquished U.S. citizenship or long-term residency. It applies specifically to gifts and inheritances from covered expatriates—those who met certain net worth or tax liability thresholds when they expatriated. Unlike typical gift tax rules, where the donor reports and pays the tax, Form 708 shifts responsibility to the recipient.
This requirement stems from the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008, which introduced Section 2801 of the Internal Revenue Code. Under this law, U.S. citizens and residents who receive gifts or inheritances from covered expatriates may owe tax at the highest estate or gift tax rate in effect—40% in 2024. The tax applies even if the expatriate would not have been subject to U.S. estate or gift tax had they remained a citizen or resident.
Form 708 ensures that wealthy individuals who renounce U.S. status do not avoid taxation by transferring assets to U.S. persons. Recipients must determine whether their benefactor qualifies as a covered expatriate, as failing to file can lead to penalties.
Who Must File
Recipients of gifts or inheritances from former U.S. citizens or long-term residents may need to file Form 708 if the provider is a covered expatriate. This designation applies to individuals who met specific financial thresholds when they relinquished U.S. status, such as exceeding net worth or average annual tax liability limits set by the IRS.
The filing requirement primarily applies to U.S. citizens and residents, including green card holders domiciled in the U.S. for tax purposes. If a U.S. person receives cash, real estate, securities, or other assets from a covered expatriate, they must determine whether the transfer is taxable. Some exceptions exist, such as transfers to tax-exempt organizations or political entities.
When multiple recipients inherit assets from a covered expatriate, each must assess their portion separately. For example, if a covered expatriate leaves a $2 million estate to three U.S. beneficiaries, each must determine their filing obligation based on their share. The tax implications may vary depending on how the inheritance is structured, particularly if assets are held in trusts or distributed over time.
Tax Treatment of Gifts From Expatriates
Gifts and inheritances from covered expatriates are taxed differently from standard wealth transfers. Normally, the donor pays any gift tax, but under Section 2801, the recipient is responsible.
The tax is calculated using the highest estate or gift tax rate in effect at the time of receipt—40% in 2024. It applies to the fair market value of the gift or inheritance on the date received, not the original cost basis. For example, if a covered expatriate gifts $500,000 in stocks to a U.S. resident, the recipient may owe up to $200,000 in tax, regardless of the donor’s original purchase price.
Unlike standard estate and gift tax rules, certain exemptions do not apply. The annual gift tax exclusion, which allows individuals to give up to $18,000 per recipient in 2024 without reporting requirements, does not apply to gifts from covered expatriates. Similarly, the lifetime estate and gift tax exemption—$13.61 million in 2024—does not shield these transfers. The only relief comes from foreign tax credits if a similar tax was already paid to another country.
Filing Steps
Form 708 is due by April 15 of the year following the receipt of the gift or inheritance. An automatic six-month extension is available if requested before the deadline, but any tax owed must still be paid by April 15 to avoid interest and penalties.
Accurately valuing the received asset is essential. The fair market value on the date of transfer determines the taxable amount, which can be complex for illiquid assets like privately held businesses, real estate, or intellectual property. Professional appraisals or third-party valuation reports may be necessary to support reported values. The IRS may challenge valuations that seem inconsistent with market conditions, leading to additional tax assessments and penalties.
Documentation to Include
Proper documentation is necessary to support the information reported on Form 708. The IRS may request additional details if reported figures appear inconsistent or if the transfer involves complex financial instruments.
For cash or publicly traded securities, bank statements or brokerage account records should verify the transaction date and amount. For real estate or privately held businesses, professional appraisals are often required. If the asset was subject to foreign taxation, documentation proving the amount paid and the applicable foreign tax law should be included to claim any potential credits. Legal agreements or estate documents can also help clarify the nature of the transfer.
Trust distributions require additional documentation, particularly if assets were held in a foreign trust before being transferred. In such cases, recipients may need to provide trust agreements, financial statements, and records of prior distributions. If the expatriate provided the gift through an intermediary, such as a foreign corporation or partnership, ownership records and transaction details should establish the source of the funds. Given the complexity of these transfers, consulting a tax professional can help ensure compliance.
Penalties for Noncompliance
Failing to file Form 708 or underreporting the value of a taxable gift or inheritance can result in financial penalties. The IRS imposes a failure-to-file penalty of 5% of the unpaid tax per month, up to 25%. If the tax remains unpaid, an additional failure-to-pay penalty of 0.5% per month applies, also capped at 25%. These penalties can add up quickly, especially if the recipient is unaware of their filing obligation.
If the IRS determines that the failure to file was due to willful neglect rather than reasonable cause, more severe consequences may apply. Accuracy-related penalties of 20% can be imposed on any underreported tax liability. If fraud is suspected, the penalty can increase to 75% of the underpaid amount. Interest also accrues on any unpaid tax from the original due date. The IRS may challenge valuations that appear artificially low, leading to additional assessments and penalties.