Significant tax benefits can occur when taxpayers invest in Qualified Opportunity Funds, which invest in Opportunity Zones that were created by Congress, and the IRS says that over 6,000 of these funds invested about $29 billion in Opportunity Zones through 2019, but plans to ensure funds comply with requirements depend on data that isn’t readily accessible.
New Government Accountability Office (GAO) testimony highlighted that it could be difficult for IRS to find investors who aren’t following the rules if the plans’ data isn’t readily available. GAO testified that IRS should develop plans to comply with requirements.
“Based on case studies of Qualified Opportunity Funds—investment vehicles organized for investing in Opportunity Zones—the tax incentive attracted investment in a variety of projects, including multifamily housing, self-storage facilities, and renewable energy businesses,” GAO wrote. “According to survey responses and other sources, most projects are real-estate focused.”
IRS faces challenges in implementing plans for Qualified Opportunity Funds, specifically challenges with data, along with funds attracting investments from high-wealth individuals and groups of investors. The IRS considers these types of investors to be risky because they are generally higher risk for tax noncompliance.
“However, IRS has not researched potential compliance risks these groups pose for this tax incentive,” GAO wrote. “As a result, IRS may be unable to effectively direct compliance efforts.”
GAO recommends, “IRS’ Small Business and Self-Employed and Large Business and International divisions research compliance risks posed by high-wealth individuals and large partnerships that are using the Opportunity Zone tax incentive and take appropriate steps to address risks identified.”
IRS agreed to conduct the research, but said that it could not agree to take related mitigating actions because it needs to consider available resources and competing priorities of work based on the highest risk for noncompliance.