Recent Analysis from Federal Government Highlight Opportunity Zone Investment and Compliance
On October 7, 2021 the Government Accountability Office (GAO) issued their second report on Qualified Opportunity Zones (QOZs). The GAO report included more than 100 pages of analysis on the overall effectiveness of the QOZ program. Similarly, on November 16, 2021 the House Ways and Means Committee conducted a hearing on QOZs.
Total estimated QOZ equity approaches $90 billion
This is the GAO’s second annual report on QOZs. Their new estimate of QOZ investment is much higher than what was originally reported in the 2020 report, which previously estimated $19 billion of investment through the 2019 tax year. The 2021 report incorporated more reliable data from 2019 tax return filings from self-certified Qualified Opportunity Funds (QOFs), and reported an estimated $29 billion of investment in QOZs through the 2019 tax year. Given that the GAO report did not consider data from paper-filed 2019 tax returns or tax return data from the recently concluded 2020 tax filing season, it is estimated that the amount of QOZ investment has grown by a factor in excess of three; much beyond the $29 billion referred to in this 2021 report. Additionally, many QOZ projects commonly use debt to fund some portion of total expected project costs, which add to the overall economic impact of QOZ investments.
Insufficient Oversight and Monitoring
The GAO observed that the IRS struggled monitoring taxpayer compliance with the QOZ program. The GAO issued two recommendations:
- The IRS needs access to more real-time data data so that it can aide in the overall assessment of the QOZ program’s success; and
- The IRS needs to implement stronger risk management procedures to ensure compliance with program requirements.
The GAO report revealed that almost 20% of 2019 QOF tax filings were submitted by paper. The GAO report also noted that the IRS’ Small Business/Self-Employed (SB/SE) division was assigned the primary responsibility of enforcing QOZ program compliance. The SB/SE generally does not examine high-risk taxpayers who typically fall under the jurisdiction of the IRS’ Large Business and International (LB&I) division. GAO case studies found that a significant number of QOF investors are considered high-risk taxpayers. Furthermore, as illustrated by our last blog post, the LB&I division will be taking on additional responsibility in the near future through the Large Partnership Compliance Pilot Program.
States Begin Offering Additional Incentives to Attract Economic Investment
Several jurisdictions have created incentive programs to align with federal QOZ benefits. Many of these new state tax credits are administered similarly to existing income tax credits, such as low-income housing, workforce development and small business tax credits. States that have special QOZ tax benefits include Alabama, Kentucky, Louisiana, Mississippi, Nebraska, Ohio, Oklahoma, Rhode Island, Texas, Virginia and Washington D.C.
House Ways and Means Committee Hearing
Members insisted that there is no desire to repeal the QOZ program, but instead to reform it. The Committee hopes that through the implementation of additional reporting and monitoring, the QOZ program will continue to be successful in achieving long-term economic success in targeted communities.
What’s Next?
While the GAO’s report and the House Ways and Means Committee hearing show progress for the QOZ program, QOZ stakeholders should expect increased compliance monitoring and reporting requirements in the future. As covered earlier this month, “November and December were two of the hottest months [of 2019] for opportunity zone investment” and it is expected that “the last two months of 2021 [will] mirror […] 2019, with many investors looking to take advantage of an expiring benefit.”
A Thanksgiving-inspired thank you to Matthew Dunscombe and Brian Duren for authoring this post.
Source: Government Accountability Office
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
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