A Section 28.2801-1 Regulation Overview (with Examples)

28.2801-1 Covered Gifts and Bequest Regulations (with Example)

28.2801-1 Covered Gifts and Bequest Regulations

In early January 2025, the tax regulations for covered gifts and bequests were finalized and published. These regulations are critical when it comes to Taxpayers who are expatriating (U.S. Citizens and Long-Term Lawful Permanent Resident) and are considered to be covered expatriates. In this series by Golding & Golding, we will go through the basics of the regulations and how they may impact covered taxpayers. Let’s start with the basics:

28.2801-1 Covered Gifts and Bequest, Foreign Trust Elections

• • • In general.

      • Section 2801 of the Internal Revenue Code (Code) imposes a tax (section 2801 tax) on covered gifts and covered bequests, including distributions attributable to covered gifts and covered bequests from non-electing foreign trusts, received by a U.S. citizen or resident from a covered expatriate during a calendar year. Domestic trusts, as well as electing foreign trusts, are subject to tax under section 2801 in the same manner as if the trusts were U.S. citizens. See section 2801(e)(4)(A)(i) and (B)(iii).

      • Accordingly, the section 2801 tax is paid by the U.S. citizen or resident, domestic trust, or electing foreign trust that receives the covered gift or covered bequest, including distributions attributable to covered gifts and covered bequests from non-electing foreign trusts. For purposes of the regulations in this part 28 (26 CFR part 28), references to U.S. citizens are considered to include domestic trusts and electing foreign trusts. (b) Applicability date. This section applies to covered gifts or covered bequests received on or after January 1, 2025.

What Does 28.2801 Mean?

This means that Section 2801 of the Internal Revenue Code imposes a tax on Covered Expatriates involving gifts and bequests. The tax is levied on a U.S. Citizen or Resident who receives a gift or bequest from a Covered Expatriate (even if the gift is facilitated through a trust). In other words, if the gifts are being facilitated through certain trusts, then these rules still apply (even if it is not coming directly from a covered expatriate individual).

Who Pays Section 2801 Taxes?

It is very important to note that the tax is paid by a U.S. Citizen or Resident (or trust) who receives the gift. This places a very large burden on the U.S. Citizen or Resident who may have done little more than receive a gift from a parent who is no longer a U.S. person, but who was covered at the time they expatriated.

Trusts and Covered Gifts/Bequests

Since the regulation references trusts, it is important to note that trusts can also be entangled in the 2801 gift tax. In other words, if the recipient is a U.S. person receiving the gift or bequest through a trust, they too may be subject to the covered expatriate gift/bequest rules – with the trust being responsible for paying the tax imposed.

2801. Imposition of tax

• • • “(4) Transfers in trust

      • (A) Domestic trusts

        • In the case of a covered gift or bequest made to a domestic trust-

          • (i) subsection (a) shall apply in the same manner as if such trust were a United States citizen, and

          • (ii) the tax imposed by subsection (a) on such gift or bequest shall be paid by such trust.

      • (B) Foreign trusts

        • (i) In general

          • In the case of a covered gift or bequest made to a foreign trust, subsection (a) shall apply to any distribution attributable to such gift or bequest from such trust (whether from income or corpus) to a United States citizen or resident in the same manner as if such distribution were a covered gift or bequest.

Common 2801 Examples

• • • Example: David is a Covered Expatriate who gives a gift to his U.S. citizen son Daniel. Even though David is not a U.S. person any longer, he was covered when he expatriated and therefore, Daniel is subject to 2801 taxes (and Daniel is liable for the taxes due).

    • Example: Peter is a Covered Expatriate who gives a gift to a Domestic Trust owned by his Son, Paul, who is a U.S. citizen. The Trust is responsible for paying the taxes on the covered gift.

    • Example: Scott is a Covered Expatriate who gives a gift to a Foreign Trust, in which the foreign trust distributes the money to Scott’s U.S. citizen daughter, Samantha. This is still a covered gift and the distribution is still subject to 2801 taxes, with Samantha liable for paying the taxes due.

*Credits for taxes paid may be applicable.

Late- Filing Disclosure Options

If a Taxpayer is out of compliance before they expatriate, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them. *Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

  Contact our firm today for assistance.