IRS Letters to QOFs, OZ Investors Require Action from Taxpayers

Published by Brent Parker on Tuesday, April 19, 2022 - 12:00am

The Internal Revenue Service (IRS) last week announced it will send letters to certain opportunity zones (OZ) stakeholders who need to take action to either maintain their certification as a qualified opportunity fund (QOF) and to taxpayers who need to ensure their investments in QOFs reach the standard to qualify for OZ incentive tax benefits.

Three letters will go out to QOFs for two different reasons. All letters will require action upon receipt.

QOFs: Letter 6501

Letter 6501, Qualified Opportunity Fund Investment Standard, may be received by taxpayers who filed IRS Form 8996, Qualified Opportunity Fund, with their tax return. According to the IRS announcement, the letter will inform taxpayers that they need to update information to support their annual certification of investments, because that information is missing, invalid or their investment standard calculation is not supported by the amounts they report on Form 8996.

Action will be required to maintain certification as a QOF: Upon receiving Letter 6501, QOFs may need to file an amended return or administrative adjustment request (AAR). The price for failing to take action is significant: The IRS may refer its tax account for examination and investors who made an election to defer eligible gains by investing in the QOF could also be subject to examination.

Investors: Letters 6502, 6503

Letter 6502, Reporting Qualified Opportunity Fund Investments, and Letter 6503, Annual Reporting of Qualified Opportunity Fund Investments, may be received by taxpayers to notify them of a failure to property follow instructions for Form 8997, Initial and Annual Statement of Qualified Opportunity Fund Investments. The IRS announcement said this failure is due to taxpayers filing forms that have invalid or missing information or not having followed requirements to maintain their qualifying investment in a QOF with the filing of Form 8997.

Recipients of Letters 6502 and 6503 may also need to file an amended return or an AAR–in this case, with a properly completed Form 8997 attached. Failure to do so could mean their investment in a QOF may not qualify and the IRS may refer their tax accounts for examination. In that scenario, letter recipients may owe taxes, interest and penalties on the gains not properly deferred.

Next Steps

As explained for each letter, taxpayers must take action upon receiving the letters: Generally, filing an amended return or an AAR (with an attachment in the case of investors) will be required. Taxpayers should consult an OZ professional immediately upon receiving any of the three letters. Even if recipients believe the letter(s) received to be in error, they should contact their OZ tax professional immediately and expect to commence discussions with the IRS prior to any deadline discussed in the respective letter(s).

The ongoing state of the OZ marketplace, rules and regulations will be topics at the Novogradac 2022 Spring Opportunity Zones Conference this week in Long Beach, California; registration for the event is still open. The conference and marketplace were the topic of last week’s Tax Credit Tuesday podcast.