New IRS Form 708 (Covered Gifts and Bequests) Explained

New IRS Form 708 (Covered Gifts and Bequests) Explained

New IRS Form 708 (Covered Gifts and Bequests) Explained

What is IRS Form 708, 40% Covered Gift and Bequest Tax

Recently, the Internal Revenue Service finally released a draft of Form 708. This form is very important for certain U.S. taxpayers because it requires U.S. taxpayers who receive gifts from covered expatriates to report this information each year to the IRS. In addition, it should be noted that taxpayers who receive covered gifts and bequests may be required to pay tax upon the receipt of the gift of request, upwards of 40%. The complexity of Form 708 ranges from general gift reporting similar to a Form 3520 or 709 to a more complicated calculation for certain trust distributions and trusts that have migrated. Let’s take a brief introductory look at the basics of draft form 708.

PART I of Form 708

The top of Part 1 of the Form 708 is relatively straightforward and just asks the taxpayers’ general information, address, tax ID number, and the name and title if it is a fiduciary.

Preparing the Form 708

The quintessential question is whether the filer received a gift or a covered request from a covered expatriate. Essentially, when a covered expatriate gives a gift to a U.S. person, there may be an immediate tax implication to the U.S. person (different than Form 3520 gifts from NRAs). The goal of Form 708 is to track foreign gifts and to prevent the situation in which a taxpayer who is a U.S. citizen expatriates and then transfers assets to U.S. persons (which would be part of a greater strategy to artificially reduce their exit tax when they expatriate).  Thus, the IRS determined that if the expatriate was a covered expatriate, then there would be a gift tax implication to the US recipient, noting that there are various exceptions, exclusions, and limitations.

What is a Protective Form 708?

For some individuals who want to play it safe, if they receive a gift or request from an expatriate and believe it is not a covered gift or request, they may file a protective Form 708. This will begin the running of the statute of limitations (presuming that the form is prepared correctly).

Trust Reporting on Form 708

For U.S. tax filers of Form 708 who were considered to be a domestic or foreign trust, they will have some additional reporting required in order to determine if any elections were made and if the trust had migrated during the tax year the 708 is being filed.

Part II Tax Computation

Part II of Form 708 deals with the tax computation, and unfortunately, the taxes can be significant. First, the taxpayer must identify the value of the covered gifts and requests along with the annual exclusion amount for the year. Next, after the exclusion is deducted from the value of the gift or request, the taxpayer pays tax at the rate of 40%. If foreign gift or estate taxes have been paid on the covered gift and request, that amount is also included as part of the tax computation.

PART III Identifying the Covered Expatriate

For U.S. persons who receive gifts from covered expatriates, the U.S. person must provide information about the covered expatriate. This also allows the IRS to keep tabs on which covered expatriates are gifting money and assets to U.S. persons. The taxpayer must include information regarding the name of the covered expatriate, the expatriation date, the identifying number of the covered expatriate, and, if the person passed away — the date of death.

Remainder of the Form 708

In a more complicated situation in which the taxpayer is receiving a gift from a covered expatriate through a foreign trust or a trust that migrated, the taxpayer may have additional Form 708 filing requirements. However, relative to the foreign trust, the taxpayer may be able to make certain elections regarding how the trust is treated for U.S. tax purposes, which can ultimately impact how the gift is taxed.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, 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.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

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.