Treasury Proposes New QOZ Reporting Rules, Daily Penalties
Proposed regulations would convert IRS Form 8996 into a standalone annual return for Qualified Opportunity Funds, backed by a new daily penalty regime for non-compliance.
The U.S. Treasury and IRS have issued proposed regulations that would create a formal information reporting regime for Qualified Opportunity Funds (QOFs). The rules would transform the program from a largely self-policed incentive to an enforced compliance system with significant penalties for failures.
Key provisions would convert IRS Form 8996 into a mandatory, standalone annual information return, introduce daily penalties of $500 or more for reporting failures, and require Qualified Opportunity Zone Businesses (QOZBs) to furnish compliance data to their QOF investors. The proposal also establishes an exclusive procedure for a QOF to voluntarily decertify, a step that would trigger an immediate taxable gain inclusion for all its investors and permanently foreclose the program's 10-year gain-elimination benefit.
If finalized, these rules will require QOF sponsors and managers to build robust compliance and data-tracking systems. Counsel should advise clients to update fund and joint venture agreements to add information-sharing covenants, allocate penalty risk, and establish clear governance procedures for any potential decertification decision.