Morris Manning & Martin, LLP

Qualified Opportunity Funds and Investors May Need to Take Additional Action

12.11.2020

In the next few days, some taxpayers who sought federal tax benefits under the Qualified Opportunity Zone (QOF) incentive in 2018 may be surprised to receive a letter from the IRS stating that they might need to take additional action to avoid owing additional tax, interest, and penalties.

QOF Self-Certification: Letter 6250

On Wednesday, December 9, 2020, the IRS announced it is sending letters to entities that failed to properly file Form 8996, the form used to self-certify as a QOF. Self-certification is the process by which entities qualify as special investment vehicles that make capital investments in Qualified Opportunity Zones, allowing QOF investors to take advantage of significant tax benefits.

The IRS will ask that these entities file an amended 2018 return or an administrative adjustment request (AAR) to correct their Form 8996. Entities that do not comply with the request may be subject to examination, and taxpayers that invested eligible gains in such entities may also be subject to an examination for making an invalid deferral election as a result of the QOF’s noncompliance.

Reporting for Individual Investors: Letter 6251

The IRS also announced that QOF investors may receive a separate letter stating that the taxpayer may have failed to properly file Form 8949 or otherwise made an invalid deferral election for eligible gains invested into a QOF. Form 8949 is used to report sales and exchanges of capital assets and the deferral of eligible gains invested in one or more QOFs.

Like the entities described above, the IRS will ask such taxpayers receiving the letter to file an amended return or AAR. Failure to do so may result in the referral of the taxpayer’s tax account for examination, which could result in such taxpayer owing additional taxes, interest, and penalties.

Next Steps

We recommend that QOFs alert their investors to the potential of receiving Letter 6251. QOFs and QOF investors should consult with their tax advisors in the event that they receive one of the aforementioned letters.

If you have any questions about this legal update, please reach out to the authors or any of your contacts at Morris, Manning & Martin, LLP.