global Tax IRS is Sending Letters to Opportunity Zone Investors…Here’s What You Should Know June 02, 2022 Did you receive a letter from the IRS regarding your qualified opportunity fund? Here’s what you should know. Attention OZ investors…be on the lookout for Letter 6501, Qualified Opportunity Fund (QOF) Investment Standard, in your mailbox. The IRS has begun sending these letters to gather more information about your investments. Here’s what you should know. OZ refresher The Tax Cuts and Jobs Act (TCJA) introduced a new investment vehicle called Opportunity Funds which help direct resources to low-income communities, known as Qualified Opportunity Zones, to help investors avoid capital gains tax. Opportunity zones are designed to spur economic development and job creation in struggling communities. Governors in every state designate opportunity zones that are deemed economically distressed, so investments in these zones are potentially eligible for preferential tax treatment. The fund must hold at least 90% of its assets in “qualified opportunity zone property” Benefits Investing in opportunity funds to support opportunity zones can provide many incentives: Capital gain deferralPotential reduction of the amount of gain realized through a basis adjustmentPotential permanent gain exclusion of the appreciation There is no cap on how much money can be invested in opportunity zones. What is form 8996? A QOF must self-certify with the IRS by filing Form 8996 with its tax return for each year the fund will operate as QOF. This form will also be where the QOF certifies it meets the 90% requirement. What is Letter 6501, Qualified Opportunity Fund Investment Standard? If you filed form 8996 with your tax return, you may be receiving correspondence from the IRS through Letter 6501. Letter 6501 alerts you of additional steps you must take to meet the annual self-certification requirements. You need to respond to this letter promptly to maintain your QOF status. Letters 6502 and 6503 Applicable taxpayers may also receive Letter 6502 Reporting Qualified Opportunity Fund (QOF) Investments, or Letter 6503, Annual Reporting of Qualified Opportunity Fund (QOF) Investments. Letters 6502 and 6503 relate to Form 8997, Initial and Annual Statement of Qualified Opportunity (QOF) Investments. Taxpayers who receive these letters have missing or invalid information or may not have properly followed the requirements to maintain their qualifying investment in a QOF with the filing of the form. Failure to act and respond to the letter could cause a taxpayer’s investment in the QOF to not be qualified or eligible for deferral. It is also possible that the IRS may refer the returns for examination which could result in additional taxes, interest and penalties on gain not deferred correct. Did you get a letter? Please contact us so that we can assist and help you navigate the process.
