Opportunity Zones: Census Tract Designations, Investing Activities, and IRS Challenges Ensuring Taxpayer Compliance
What the GAO found
The 2017 law commonly known as the Tax Cuts and Jobs Act created a tax incentive that gave governors the discretion to generally designate up to 25% of their states’ low-income census tracts as work zones. special investment called opportunity zones. The US Treasury Department then verified eligibility and designated the nominated plots. GAO found that, on average, selected areas had higher poverty and a larger share of non-white populations than eligible, but not selected areas. These differences were statistically significant.
Most state government officials were aware of at least some Opportunity Zone investments, but until now had differing views on the effect of the tax incentive.
Opinions of State Respondents on the Overall Impact of the Opportunity Zone Tax Incentive
Note: GAO interviewed government officials from all 50 states, Washington, DC, and five US territories: American Samoa, Guam, Commonwealth of the Northern Mariana Islands, Puerto Rico, and US Virgin Islands. He received 56 responses.
Based on case studies of Qualified Opportunity Funds – investment vehicles organized to invest in areas of opportunity – the tax incentive has attracted investment in a variety of projects including multi-family housing, self-service storage and renewable energy companies. According to survey responses and other sources, most projects are focused on real estate.
Through 2019, more than 6,000 qualified opportunity funds had invested around $29 billion, based on partial data from the Internal Revenue Service (IRS).
The IRS has developed plans to ensure that qualified opportunity funds and investors comply with tax incentive requirements; however, the IRS faces challenges in implementing these plans. Specifically, plans depend on data that is not readily available for analysis. Additionally, the funds have attracted investment from high net worth individuals, and some funds are organized in partnerships with hundreds of investors. The IRS considers these two groups to be at high risk for tax non-compliance in general. However, the IRS has not investigated the potential compliance risks these groups pose for this tax incentive. Consequently, the IRS may be unable to effectively direct compliance efforts.
Why GAO Did This Study
Congress created the Opportunity Zones tax incentive to stimulate investment in struggling communities. Taxpayers who invest in Qualified Opportunity Funds, who then invest in qualifying property or businesses, could benefit from significant tax advantages. Funds and their investors generally must invest in Opportunity Areas for a minimum number of years and report information annually to receive tax benefits and avoid penalties. The IRS administers and enforces these rules. The GAO has been tasked with reviewing the implementation and use of this tax incentive.
This report describes the process of designating census tracts as opportunity areas and compares the characteristics of designated and undesignated tracts; describes experiences of Qualified Opportunity Funds and views of tax incentives; analyzes the available IRS data; and evaluates IRS taxpayer compliance plans, among other goals.
GAO analyzed census data on parcels designated and not designated as opportunity areas, analyzed data from a non-generalizable sample of 18 qualified opportunity funds, and interviewed state officials. The GAO also reviewed IRS documentation, including a compliance plan, and met with Treasury and IRS officials.