Bipartisan legislation is a rare bird in Washington these days when “[o]ne hundred percent of [Senate Republicans’] focus is [on] standing up to this administration.”1 So something has to be pretty important for lawmakers on both sides of the aisle and in both chambers of Congress to agree that new legislation is needed. And that happened on April 7, 2022, with the introduction of the Opportunity Zones Transparency, Extension, and Improvement Act (“Act”). The Act, if passed into law, would make some major changes to the qualified opportunity zone (“QOZ”) tax rules.2 Specifically, the Act would disqualify certain census tracts from QOZ eligibility, expand reporting requirements and strengthen the QOZ incentive, all in order to ensure that the rules better support economic development of low-income communities. And just a few days after the Act was introduced, the Internal Revenue Service (“IRS”) announced that it is stepping up its monitoring of qualified opportunity fund (“QOF”) compliance.

I. QOF and QOZ Changes to Be Made by the Act

A. Extension of Deferral Period

Most importantly, the Act would extend the deferral period for paying the deferred tax on gains invested in a QOF from December 31, 2026, to December 31, 2028. It would also reduce the required holding period for investors to receive the additional 5% step-up in basis from seven to six years. These changes would apply retroactively to investments made after December 22, 2017.

B. Expanded QOF Definition

The Act would make a technical change that would facilitate structuring QOF investments. Currently, QOFs cannot invest in other QOFs, a rule that has the effect of preventing the use of feeder vehicles. The Act would allow a QOF to be organized as a “qualified feeder fund” that may invest in other QOFs. A qualified feeder fund is required to be formed as a partnership and invest 95% of its assets into a QOF, and all investments made in the qualified feeder fund must be made in cash.

C. Modification of QOZ-Designated Census Tracts

i. Disqualification of Certain Census Tracts

The Act includes provisions that would change the census tracts designated as QOZs. There are currently 8,764 census tracts designated as QOZs under Section 1400Z-1 of the Internal Revenue Code of 1986, as amended (“Code”), that span across the United States, the District of Columbia and five US territories. The Act would disqualify census tracts from QOZ eligibility that are considered to have affluent populations, as their designations as QOZs are inconsistent with the purpose of the QOZ program to draw capital to underserved and overlooked communities. Observers believe that only a very narrow set of QOZs in California and New York would be affected by the proposal.3

In general, under the Act, census tracts with a median family income that exceeds 130% of the national median family income would not retain their QOZ status. However, census tracts with a poverty rate of 30% or higher for non-student populations would retain their qualification. In addition, state executives would be permitted to seek a determination from Treasury to add or remove sunset census tracts. State executives would be allowed to replace the sunset census tracts and designate an equivalent number of qualifying low-income census tracts as QOZs. Replacement tracts would retain their QOZ status for 10 years, beginning on the date of designation.

As soon as practical and not more than 12 months after the date of enactment of the Act, Treasury would publish an initial list of disqualified QOZs and a list of non-QOZ low-income communities that are eligible to be nominated as replacement QOZs. Any disqualified census tract would not be treated as a QOZ after the date that is 30 days after the date Treasury publishes the final list of disqualified QOZs.

The Act provides grandfather rules preserving the tax benefits for “qualified pre-existing trade or business” in QOZs whose designation as such is lost under the Act. The “trade or business” standard may be difficult to meet for projects that are still in the planning stages as of the date of enactment of the Act. A QOF has a qualified pre-existing trade or business if it meets one of three tests:

  1. Before the date of enactment of the Act, the trade or business files a registration statement with the Securities and Exchange Commission, prepares an offering memorandum or prepares a similar disclosure document that discloses the intent of such trade or business to invest in the disqualified QOZ;
  2. Before the date on which such disqualified QOZ appeared on either the initial or final list of disqualified tracts published by Treasury, the trade or business makes or enters into a binding agreement to make an investment of more than $250,000 in the disqualified tract; or
  3. The IRS determines that the trade or business relied on the designation of the tract as a QOZ and will suffer a loss as a result of the tract’s disqualification as a QOZ.

However, even if a QOF or qualified opportunity zone business (“QOZB”) is established before the sunset of the QOZ designation, it may not undertake new projects or enter into new trades or businesses.

ii. Brownfield Industrial Sites

The Act would also expand QOZ eligibility for former industrial areas known as “brownfield industrial sites.”4 Under original designation rules, areas with no residents were not eligible for the QOZ tax advantages. The Act would allow for an unpopulated area to be designated as a QOZ to the extent such area is adjacent, including by water, to an existing QOZ; was previously used for industrial purposes; and is a brownfield industrial site. This change is expected to permit the Tradepoint Atlantic project in Sparrows Point (near Baltimore, Maryland) to qualify as a QOZ.5

D. Enhance Information Reporting Requirements and Related Penalties

The Act recycles expanded filing requirements for QOFs and investors that Congress previously proposed but did not enact.6 First, for tax years beginning after passage of the Act, the Act would codify and expand the information required to be reported on IRS Form 8996, Qualified Opportunity Fund. Proposed Code § 6039K would require QOFs to report the number of persons employed through QOZ investments. It would also require QOFs to report how the fund is structured and the value of total assets held by the fund as of the required testing dates.7 Funds would be required to report the census tract where the property is located, whether the property is owned or leased, the aggregate value of the items of property as of the reporting dates and the number of residential units, if applicable. Concomitant rules would require every applicable QOZB to provide QOFs with information that will enable the QOF to comply with the new information reporting requirements.

The Act would enforce the new reporting with significant non-compliance penalties. Specifically, non-compliant funds would be subject to a penalty of $500 per day, with a $10,000 cap, but if the value of the total assets of the fund for the tax year exceeds $10,000,000, a $50,000 cap would apply. In cases of intentional disregard, penalties for funds would increase to $2,500 a day, with a cap of $50,000 or $250,000 for large QOFs.

The Act would also impose new reporting requirements on investors in QOFs. These requirements would include reporting critical information on QOZ investments, including funds receiving investments; relevant dates on which investments and dispositions are made; descriptions of QOZ investments; and measures that will continue to allow the IRS to track both the deferral and recognition of gains, the trajectory of QOZ investments over time and compliance more broadly. Non-compliant investors would be subject to a $5,000 penalty for failure to comply with their respective reporting requirements. Investors who exhibit intentional disregard would be subject to a heightened $25,000 penalty.

II. Stepped-Up IRS Compliance

The IRS must have felt emboldened by the introduction of the Act because, only five days after the Act was introduced, the IRS announced that it would be sending QOF investors IRS Letter 6501 Qualified Opportunity Fund (QOF) Investment Standard when the information required to be provided by investors is “missing, invalid or the calculation isn’t supported by the amounts reported.”8 The IRS stated that if an investor fails to respond to the request, the IRS may refer the taxpayer to Exam for an audit. This enhanced reporting comes on the heels of a Treasury Inspector General for Tax Administration (“TIGTA”) report in February 2022 that found “obvious and blatant inaccuracies” in QOF reporting.9

The IRS also presaged two additional letters that it will send to QOF investors: (i) Letter 6502 and (ii) Letter 6503. Each of these letters will be sent to QOF investors who have not properly followed the instructions for Form 8997, the form for reporting initial QOF investments.


Authors Mark H. Leeds (; (212) 506-2499) and Stephanie F. Wood (; (212) 506-2504) are tax lawyers in the New York office of Mayer Brown LLP. Mark and Stephanie regularly assist both sponsors and investors of structured qualified opportunity funds.



1 Wise, McConnell Says 100% of His Focus Is on Blocking Biden Agenda, Wall Street Journal (May 5, 2021).

2 S. 3065 – 117th Congress: Opportunity Zones Improvement, Transparency, and Extension Act; H.R. 7467 – 117th Congress: Opportunity Zones Improvement, Transparency, and Extension Act.

3 Slowey, Basu and Wilhelm, New Opportunity Zone Bill Offers Limited Chances to Redraw Maps, Bloomberg News 2022-04-11T06:22:28634-4:00.

4 The Act defines the term “brownfield industrial site” as any census tract that includes real property whose expansion, redevelopment or reuse may be complicated by the presence or potential presence of a hazardous substance or pollutant or contaminant, including real property covered by a prospective purchaser agreement or similar agreement entered into by the US Environmental Protection Agency or the appropriate state authority.

5 Slowey, Basu and Wilhelm, supra.

6 For our coverage of these prior efforts, see Leeds and Wood, Qualified Opportunity Fund Update: Likely Biden and Administration Changes and New Rules for Non-US Investors & Working Capital Safe-Harbor (

7 See Code § 1400Z-2(d)(1).

8 IR-2022-79 (April 12, 2022).

9 TIGTA, Additional Actions Are Needed to Address Qualified Opportunity Fund and Investor Noncompliance (Report No. 2022-40-18) (February 7, 2022).