Proposed regs provide framework for transition to permanent QOZ program
The Treasury Department and the IRS on Sept. 11 released proposed regulations (REG-116506-25) providing long-awaited guidance on the expanded information reporting and certification framework for the QOZ program. These regulations implement the transition to the overhauled program under the OBBBA, which made the QOZ program permanent.
The clarity is welcomed, but businesses and investors will likely find that compliance requires an intentional and informed approach to participation.
Major features of the proposed regulations are as follows.
Mandatory annual information returns
Every QOF is now required to file an annual information return on an updated Form 8996. QOFs must file electronically. The return must include detailed data on the QOF’s assets, the value of QOZ property, and specific information on each QOZB in which it holds an interest, such as the census tract, NAICS codes, and employment impact measured by full-time equivalent employees.
Overlapping reporting requirements
The proposed rules would establish reporting requirements for each participant in the QOZ program. QOZBs, QOFs, and investors would each have to provide information on the same investments.
Under the regs, QOZBs must furnish a written statement to each QOF that holds an interest in them. This statement must be provided under penalty of perjury and is due by the first day of the second month following the close of the QOZB’s taxable year (Feb. 1 for calendar-year entities). This is meant to ensure QOFs have the data needed for their own returns.
QOFs must furnish "investor statements" to any person who disposed of an interest in the QOF during the year. These are due by March 1 for most investors, but a special deadline of Jan. 15 applies for statements furnished to brokers who are record holders of QOF interests.
Brokers must now report on Form 1099-B whether a sale constitutes a disposition of a QOF interest or an inclusion event caused by a voluntary decertification.
Daily penalties for noncompliance
New Section 6726, enacted in the OBBBA, imposes a penalty of $500 per day for each day a QOF fails to file a correct information return. Penalties have an annual cap of $50,000 for “large QOFs” (those with gross assets over $10 million at the close of the taxable year) or $10,000 for smaller funds. If the IRS determines the failure is due to intentional disregard, the daily penalty would increase to $2,500, with a cap of up to $250,000 for large QOFs.
Procedures for rolling deferral
The proposed regs would help businesses and investors navigate the shift from the original program enacted under the Tax Cuts and Jobs Act, with a fixed gain recognition date of Dec. 31, 2026, to the OBBBA’s rolling recognition date. The new regulations would implement the deferral of gains reinvested after 2026 with recognition now occurring five years from the date of the QOF investment (unless an earlier inclusion event occurs). Taxpayers will need to update their procedures for collecting and reporting accordingly.
Formal decertification procedures
The regulations set forth the exclusive procedures for a QOF to voluntarily exit the program. This would require maintaining contemporaneous written documentation (e.g., meeting minutes) and notifying all investors within 15 days of the effective decertification date. Failure to follow these formal steps can invalidate the decertification, which may expose the entity to penalties under section 1400Z-2(f) for failing the 90 percent investment standard.
Effective date
Most all of the provisions would be effective for the first information reporting deadlines occurring after the date final regulations are published. Because new zones come online Jan. 1, 2027, it is likely the final regulations will be issued quickly.. Taxpayers should be able to rely on the proposed regs in the meantime.
Public comments
The IRS and Treasury have requested written or electronic comments on the proposed regulations, to be received no later than Oct. 26, 2026. A public hearing is scheduled for Nov. 5. Comments can be submitted at https://www.regulations.gov (indicate “IRS” and “REG-116506-25”).
