Opportunity Zones in 2022: A Political Analysis

We previously shared a tax and financial analysis on the outlook for Opportunity Zone (OZ) investments in 2022. Stakeholders continue to see a strong desire for investment in designated census tracts, even though eligible investors can no longer secure the “10% step up benefit,” unavailable for investments subsequent to December 31, 2021.

In this installment of our three-part series, we will review and highlight what may lie ahead on the political landscape for the OZ program. Previously, we reported on a report released by the Government Accountability Office, which highlighted the need for the IRS to have access to more real-time data and to implement stronger risk management procedures.

Already in 2022, two important actions were taken with respect to OZ’s:

In January, Senate Finance Committee Chairman Ron Wyden (D-Oregon) opened an investigation into potential or perceived abuses of the OZ program by targeting specifically identified Qualified Opportunity Funds (QOFs). In a letter sent directly to each QOF under investigation, Senator Wyden made the following inquiries about specific projects in which the QOF is currently invested:

• Expected number of permanent jobs created
• History on each property, including when the project was conceived
• If funds were re-directed from other projects because this project was in an OZ
• Tax benefits expected to be received as a result of the project’s eligibility
• Whether the QOF advocated with a public official for the project’s inclusion in an OZ
• For real estate projects, rental rates per square foot and percentage of low income housing

Observation: The scope of these inquiries cannot be understated. Based on the results of the investigation and the possible impact of future legislation, OZ project sponsors may be subject to additional compliance requirements and may be required to submit additional information to the IRS and/or other governmental agencies.

In February, the Treasury Inspector General for Tax Administration (TIGTA) released a report making recommendations to the IRS to improve its processes which govern compliance with the OZ program. Most of these recommendations focused on the quality of the compliance process, and are directed at timely review and resolution of inaccuracies or inconsistencies involving IRS Form 8996, Qualified Opportunity Fund, and IRS Form 8997, Initial and Annual Statement of QOF Investments. Other key takeaways from this report include:

• The IRS will likely issue notices and/or examination requests for certain QOFs or QOF investors based on inaccurate or inconsistent data reviewed by the TIGTA.
• The IRS acknowledged that its ability to implement the recommended corrective actions are largely dependent on the allocation of resources and will likely be significantly limited by recent budgetary constraints.
• The IRS declined to adopt a process to automatically de-certify QOFs that intentionally do not comply with the OZ program requirements.

Observation: Since much of the data reviewed by the TIGTA focused on inaccurate or inconsistent tax filings by OZ taxpayers, special attention should be paid to upcoming filings. OZ taxpayers are strongly encouraged to engage OZ compliance specialists and advisors for their upcoming filings.

Thanks to Brian Duren, our incredible OZ leader, for authoring this blog post. As a reminder, CLA has an incredible team of nationally recognized professionals that understand the complexities of the OZ program and its reporting requirements.