In Part 1 of our series on the final Exit Tax regulations issued by the IRS on January 14, 2025, we looked at §2801 tax implications for US individuals who receive certain gifts or bequests (either directly or indirectly) from someone who has expatriated and been subject to the Exit Tax.

In this post, Part 2 of our series, we look at how long US recipients and their tax preparers should maintain records substantiating the §2801 tax reporting. We also examine tax preparer liability related to filing Form 708.

Recordkeeping Requirements for US Recipients

The recordkeeping requirements in the final regulations (§28.6001-1) do not provide an exact number of years that records must be kept. The requirements say the following:

  • “Retain permanent books of account or records as are necessary to establish the amount of that person’s aggregate covered gifts and covered bequests, and the other information required to be shown on Form 708.”
  • “So long as the contents thereof may become material in the administration of any internal revenue law.”

The question then becomes, “under what standard of materiality do we apply the retention of records for the effective administration of any internal revenue law?”  Three years? Six years? Nine years? Forever?

An ultra-conservative reading this regulation would mean forever. However, given the timeline for filing (18 to 24 months), a good rule of thumb would be 8 years total, which would cover the usual 6 years (extended statute of limitations for assessment for most US tax returns), plus the 2 years for the filing.

Recordkeeping & Other Requirements for Tax Preparers

The requirement for recordkeeping (§28.6060-1) applies to both the US recipient and the tax preparer, if a tax preparer was employed to prepare the Form 708.

There are several other regulations that impose tax preparer liability at the very end of the final regulations. They are as follows:

  • If a tax preparer prepares Form 708 (including a protective Form 708) or a claim of refund related to Form 708 (meaning Form 843), then the tax preparer must provide a copy of the final Form 708 (including a protective Form 708 or Form 843) to the client.
  • If a tax preparer prepares Form 708 (including a protective Form 708) or a claim of refund related to Form 708 (meaning Form 843), then the tax preparer must also include their preparer tax identification number (PTIN).
  • Tax preparers are subject to IRC §6694 for significantly miscalculating, undercalculating, and/or improperly calculating the Section 2801 tax by taking an “unreasonable position” on IRS Form 708. An IRC §6694 penalty is the greater of $1,000 or 50 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.
  • Tax preparers are subject to IRC §6695 and a maximum penalty not to exceed $25,000 for failing to do the following:
    • Failure to sign the return
    • Failure to furnish an identification number (see above)
    • Failure to retain records (see above)
    • Failure to furnish a copy of the tax return to the client (see above)
    • Failure to file a correct information return (examples include tie-in forms, such as the Forms 709-NA, 709, 3520, Part III, 3520, Part IV)
    • Negotiation of a check (i.e., do not pay the tax on behalf of the client)
  • Tax preparers are subject to IRC §6695A and a penalty that is the lesser of the greater of 10 percent of the underpayment of tax, $1,000, or 125 percent of the gross income received by the appraiser for the following:
    • An appraiser of property that knows or reasonably should have known that the appraisal used in the preparation of IRS Form 708 is based on a substantial valuation misstatement, a substantial estate or gift valuation understatement, or a gross valuation misstatement.

Conclusions & Recommendations

The takeaways from this portion of the final regulations are significant. First, the recordkeeping requirements to report, calculate, and substantiate items of income, expenses, deductions, and credits on Form 708 are significant.

Extreme caution should be taken by both the US recipient and, if employed as the tax return preparer of record, the tax return preparer to thoroughly document and substantiate all documentation and positions taken on Form 708. All documentation and thoroughly detailed workpapers should be retained for at least a period of 8 years, if not in perpetuity.

Second, tax return preparers should take great care with the ministerial aspects of the tax preparation related to Form 708. There are several administrative items that all tax preparers should follow that are detailed in §6695A. The penalties can be steep for a simple misstep, such as failing to sign the tax return.

Lastly, tax preparers should take great care that they have formally and completely educated themselves on both IRC §2801 and the associated final regulations when preparing Form 708, calculating the §2801 tax, documenting positions taken, and substantiating documents and records. The penalties under §6694 and §6695A are significant.

The Wolf Group suggests that tax preparers not undertake filing IRS Form 708 on first impression, i.e., do not dabble. This form should only be completed by Certified Public Accounting or Tax firms that have significant experience with international informational reporting and the US Exit Tax.