Opportunity zones can offer investors strong tax breaks—if the forms are filed right.
A qualified opportunity zone (QOZ) program aims to entice long-term private investments in distressed communities with federal tax incentives to investors, including deferring capital gains taxes.
The new IRS Form 8996 is used to certify that the corporation or partnership is a qualified opportunity fund (QOF) and to annually report whether the fund met the investment standard during its tax year.
The 8996 is tricky, some filers say, and mistakes or inaccuracies can cost investors. For example, one line requires calculation and forethought regarding when the entity elects to become an Opportunity Fund.
This form seems to have caused confusion, planners say.
“Recently, the IRS issued soft notices to some taxpayers that filed Form 8996 to address potential inconsistencies,” said Miri Forster, partner and national tax controversy leader at EisnerAmper in Iselin, N.J. Common errors on 8996 include incorrect calculation of the investment standard, omission or misreporting of the 11-digit number for the QOZ or a missing or incorrect employer identification number, she said.
“The soft notices advise taxpayers to file a corrected 8996 with an amended return or administrative adjustment request,” Forster said.
Failure to correct could result in an IRS examination, a penalty or having the amounts reported as QOZ property not included in the investment standard calculation—jeopardizing tax breaks.
This is the second year in a row that the IRS is sending soft notices related to QOZ reporting. Others have questioned dates of investment or inquired about discrepancies on other forms.
“While no one likes to get a notice from the IRS, soft notices allow the IRS to educate taxpayers on the proper completion of forms and provide taxpayers with the opportunity to get into compliance,” Forster said.