Opportunity Zones: New IRS Scrutiny Anticipated
On October 26, Frank Fisher of the IRS’ Office of the Associate Chief Counsel announced that examinations in connection with opportunity zones are expected to begin soon. Based on earlier indications from Congress, including the 2022 probes made by Senate Finance Committee Chairman Ron Wyden (D-Oregon), many OZ stakeholders have anticipated that IRS scrutiny would rise. This announcement leaves many unanswered questions, including which taxpayers will be targeted in future examination – OZ investors, qualified opportunity funds, or qualified opportunity zone businesses?
The IRS’ intentions should emphasize the importance of having the appropriate audit trail, including organizational documents and formative steps as well as a working capital safe harbor written plan and written schedule. According to the Preamble of the OZ regulations, the Treasury Department and the IRS intended to strike a balance between providing taxpayers with a flexible and efficient process for organizing QOFs, while ensuring that investments in such vehicles will be properly directed toward the economic development of low-income communities. Yet one aspect of the OZ regulations which has caused speculation among legal and tax practitioners is how the IRS would enforce the general anti-abuse rule. This broad provision gives the IRS authority to restrict investors’ tax benefits if the purpose of their transaction(s) does not align with the purposes of the OZ program, which are to encourage longer-term investments of new capital in qualified opportunity zones and to increase the economic growth within such zones.
The scope of the IRS’ recent statements remains uncertain. However, the takeaways seem clear: OZ taxpayers should be prepared to provide proper support for the investments and activities conducted in opportunity zones and should be diligent in structuring OZ transactions with the support of experienced tax and legal advisors.
CLA’s Opportunity Zone working group will continue to monitor future developments in this area.
A big thank you to Matthew Dunscombe for his contributions to this article!
Brian is a Signing Director in CLA's Real Estate industry group and has more than 15 years of experience working with real estate operators, land developers, commercial real estate companies, private equity funds, and general contractors. Brian is also part of CLA's Opportunity Zone working group, and leads a team providing compliance, consulting, and advisory services to opportunity zone investors, qualified opportunity funds, and qualified opportunity zone businesses.
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