IRS Letters to Qualified Opportunity Zone Funds and Investors Regarding Forms 8996 and 8997

calendar iconJune 17, 2022

In recent weeks, the IRS has begun sending notices related to 2019 tax filings of Form 8996 of Qualified Opportunity Zone Funds (QOFs) and Form 8997 of individual taxpayers.

These notices often request additional information and/or a correction such as:

  • Invalid or missing information related to the Federal Employer Identification Number (FEIN) of the QOF or related QOZB
  • Incorrect Qualified Opportunity Zone Census Tract numbers
  • Reporting of qualified opportunity zone property and assets held as part of the investment standard calculation
  • Improper reporting of the QOF investment at the investor level

Take Appropriate Action

Form 8996 requires very specific reporting of qualifications and is necessary for the entity to be classified as a QOF.  The designation of QOF status is the mechanism that permits investors to defer tax on their qualified investments.  Failure to make the requested corrections could lead to penalties for failure to maintain the investment standard at the QOF level.

Form 8997 requires specific reporting of the QOF in which an individual invested qualifying funds thus deferring taxable income.  Errors on this form may result in disqualification of deferral status and taxable income.

Most often, these letters lack clarity and if an individual has invested in multiple funds, it is difficult to determine which investment the letter is referencing. Funds and investors should consult with professionals experienced with QOFs, and the related reporting, to take corrective action as soon as possible.

For information on how Cherry Bekaert’s Opportunity Zone Tax Services Team can assist if you receive one of these notices, please contact us today.