Opportunity Zones: Census Tract Designations, Investment Activities, and IRS Challenges Ensuring Taxpayer Compliance
Congress created the Opportunity Zones incentive to spur investment in distressed communities. Taxpayers who invest in Qualified Opportunity Funds—which invest in zones—can get significant tax benefits.
According to IRS, over 6,000 of these funds invested about $29 billion in Opportunity Zones through 2019. The incentive attracted investment in housing, renewable energy businesses, and other projects.
IRS developed plans to ensure these funds comply with requirements. But its plans depend on data that isn't readily accessible—which could make it hard for IRS to find investors who aren't following the rules. We recommended addressing this risk.
Example of development in an Opportunity Zone in Washington, D.C.
What GAO Found
The 2017 law commonly known as the Tax Cuts and Jobs Act created a tax incentive that gave governors discretion to nominate generally up to 25 percent of their states' low-income census tracts as special investment areas called Opportunity Zones. The U.S. Department of the Treasury then verified eligibility and designated the nominated tracts. GAO found that on average, the selected tracts had higher poverty and a greater share of non-White populations than eligible, but not selected, tracts. These differences were statistically significant.
Most state government officials were aware of at least some Opportunity Zone investments but had differing views of the tax incentive's effect so far.
State Respondents' Views on Overall Impact of the Opportunity Zones Tax Incentive
Note: GAO surveyed government officials from the 50 states, Washington, D.C., and the five U.S. territories—American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands—and received 56 responses.
Based on case studies of Qualified Opportunity Funds—investment vehicles organized for investing in Opportunity Zones—the tax incentive attracted investment in a variety of projects, including multifamily housing, self-storage facilities, and renewable energy businesses. According to survey responses and other sources, most projects are real-estate focused.
Through 2019, more than 6,000 Qualified Opportunity Funds had invested about $29 billion, based on partial data from the Internal Revenue Service (IRS).
IRS developed plans to ensure Qualified Opportunity Funds and investors are complying with the tax incentive's requirements; however, IRS faces challenges in implementing these plans. Specifically, the plans depend on data that are not readily available for analysis. In addition, funds have attracted investments from high-wealth individuals, and some funds are organized as partnerships with hundreds of investors. IRS considers both of these groups to be high risk for tax noncompliance generally. However, IRS has not researched potential compliance risks these groups pose for this tax incentive. As a result, IRS may be unable to effectively direct compliance efforts.
Why GAO Did This Study
Congress created the Opportunity Zones tax incentive to spur investments in distressed communities. Taxpayers who invest in Qualified Opportunity Funds—that then invest in qualified property or businesses—could receive significant tax-related benefits. Funds and their investors generally must invest in Opportunity Zones for a minimum number of years and report information annually to receive tax benefits and avoid penalties. IRS administers and ensures compliance with these rules. GAO was asked to review implementation and use of this tax incentive.
This report describes the process for designating census tracts as Opportunity Zones and compares characteristics of designated and non-designated tracts; describes Qualified Opportunity Funds' experiences with and states' views on the tax incentive; analyzes available IRS data; and evaluates IRS's taxpayer compliance plans, among other objectives.
GAO analyzed census data on tracts designated and not designated as Opportunity Zones, analyzed data from a non-generalizable sample of 18 Qualified Opportunity Funds, and surveyed state officials. GAO also reviewed IRS documentation, including a compliance plan, and met with Treasury and IRS officials.
GAO is recommending that IRS (1) address risks caused by limited data availability, and (2) research compliance risks of high-wealth investors and large partnership Qualified Opportunity Funds. IRS generally agreed pending available resources.
Recommendations for Executive Action
|Internal Revenue Service||The Commissioner of Internal Revenue should direct the Small Business and Self-Employed division to assess the risks that data limitations pose to its Opportunity Zones tax incentive compliance plan and take steps to mitigate those risks. (Recommendation 1)||
IRS agreed with our recommendation and as of November 2022 had taken some actions to update its compliance plan to include alternative mitigating actions to the risks identified. In January 2023, we requested additional information to determine the extent to which IRS's actions address our recommendation. Assessing the risks that data limitations pose to its Opportunity Zones tax incentive compliance plan and taking steps to mitigate those risks, as we recommended, will help IRS identify and address taxpayer noncompliance.
|Internal Revenue Service||The Commissioner of Internal Revenue should direct the Small Business and Self-Employed and Large Business and International divisions to research compliance risks posed by high-wealth individuals and large partnerships that are using the Opportunity Zones tax incentive and take appropriate steps to address the risks identified. (Recommendation 2)||
IRS partially agreed with our recommendation and has initiated research on high-wealth individuals and large partnerships that are participating in Opportunity Zones to identify potential compliance risks and to make recommendations to mitigate any risks identified. In April 2022, IRS SB/SE officials said they will continue to work with IRS's research function to develop appropriate research parameters. IRS officials also said they will conduct an analysis of the research results to identify any compliance risks detected and develop recommendations to mitigate those risks as appropriate. IRS plans to implement this recommendation by October 2023. In January 2023, we requested additional information from IRS about the status of the research project. Conducting comprehensive research on taxpayer compliance with Opportunity Zones tax incentive rules that includes evaluations of high-risk taxpayers will help IRS to better plan and target its enforcement efforts.