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    IRS Sending Letters To Qualified Opportunity Funds And Investors

    The IRS has announced that it is sending out letters to Qualified Opportunity Funds (QOFs) and their investors requesting more information to certify eligibility. The letter campaign started in April, and it is important that QOFs and investors look out for these letters and submit the requested information to the IRS promptly to avoid audits and the risk of losing QOF designation. The letters are not going out to all funds, just funds and investors that have a problem or omission on their reporting.

    Certification of Investment Standard

    Taxpayers who file Form 8996, Qualified Opportunity Fund, with their return may get a letter informing them that information needed to support the annual certification of investment standard is missing, invalid or the calculation is not supported by the amounts reported. Form 8996 is used to:

    • Certify the corporation or partnership is organized to invest in Qualified Opportunity Zone property;
    • Report that it meets the 90% investment standard; and
    • Figure the penalty if it fails to meet the 90% investment standard.

    If a taxpayer gets this letter, the taxpayer may need to correct the annual certification by filing an amended return or an administrative adjustment request with more complete information.

    Meeting the 90% Investment Standard

    A QOF must satisfy the standard of investing 90% of its assets in Qualified Opportunity Zone property, determined by the average of the percentage of Qualified Opportunity Zone property held in the Fund as measured on:

    • The last day of the first 6-month period of the tax year of the QOF; and
    • The last day of the tax year of the QOF.

    The IRS may be seeking more details on Opportunity Zone property and how the fund makes the 90% determination.

    Figuring the Penalty

    A QOF has to pay a penalty for each month it fails to meet the 90% requirement. The penalty is calculated as the difference between the actual amount of qualified property held and the 90% that is required, multiplied by the IRS underpayment rate.

    Required Statement Of QOF Investments

    Taxpayers who are required to file Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, also may receive IRS letters if information is missing, invalid or they have not followed the requirements to maintain their qualifying investment in a QOF. Form 8997 is used to identify QOF investments and deferred gains held at the beginning and end of the current tax year, as well as any capital gains deferred by investing in a QOF and QOF investments disposed of during the current tax year.

    The information that must be provided is:

    • Total QOF investment holdings due to deferrals before the beginning of tax year
    • Current tax year capital gains deferred by investing in QOF
    • Inclusion events requiring gain recognition and other transfers during the current tax year
    • Total QOF investments due to deferrals at year end

    Taxpayers can file an amended return or an administrative adjustment request to provide the requested information.


    The Opportunity Zone program has been criticized as not having the desired economic effect in distressed areas and not being worth the loss in tax revenue from gain deferral. The IRS letter campaign shows that the agency is intent on making sure Opportunity Zone Funds and investors are playing by the rules.

    If a taxpayer fails to act after receiving one of these IRS letters, it may make the entity and investors subject to audit. Not addressing the problem also could result in funds and investors owing taxes, interest and penalties if gains become ineligible for deferral. Contact your Frazier & Deeter tax advisor promptly if you receive an IRS QOF letter so you can take the necessary actions to correct any issue with your QOF filings.

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