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IRS, Congress Struggle to Shed Light on Opportunity Zones’ Impact

April 8, 2019, 8:46 AM

IRS officials are trying to figure out what data the agency can collect on new incentives created under the 2017 tax overhaul, but the best hope for revealing whether the tax breaks are aiding low-income areas—rather than accelerating gentrification to the benefit of the wealthy—likely rests with Congress.

Investors are poised to plug billions of dollars into the 8,764 “opportunity zones” selected by states and approved by the Treasury Department under the 2017 law. By placing their unrealized gains from stocks or other investments into funds that invest in businesses within those zones, the investors can defer and, depending on how long they hold their investments, reduce their capital gains tax liabilities.

The Senate’s version of the tax law originally included a fairly open-ended requirement for the Treasury Department to track and report to Congress the progress and impact of the tax breaks, including poverty reduction and job creation. But just ahead of the tax overhaul’s passage in the Senate, lawmakers scrapped that mandate to ensure the legislation complied with budget reconciliation rules—the process that allowed Senate Republicans to avoid a filibuster.

There is an effort on Capitol Hill to craft legislation that would codify that reporting requirement. In the meantime, organizations are pushing the Internal Revenue Service to require opportunity zone investors to report specific information—such as numbers of affordable housing units and permanent jobs created—and then make the data public.

But it is unclear whether the agency would have the authority for such a directive, given that the law itself doesn’t explicitly require the data to be collected.

“If it’s not in the statute, it’s hard to say it was the intent of Congress, particularly if it was in the statute and then it was taken out of the statute,” said Ruth Madrigal, a principal at KPMG LLP who, while at another law firm, met with Treasury and White House officials in October on opportunity zones. “One might argue Congress doesn’t want it in there, pretty persuasively.”

Upcoming Rules

Officials at Treasury and the IRS, who tend to adhere closely to the letter of the law, are crafting a second round of proposed regulations on opportunity zones investments under tax code Sections 1400Z-1 and 1400Z-2. Those rules, now under review at the White House Office of Management and Budget, will include a request for public comment on the information the government ought to collect, said Assistant Treasury Secretary for Tax Policy David Kautter.

“What incremental information is needed is going to be, I think, fairly modest, but we’re not sure,” he told reporters at an April 1 conference in Washington. “It’s still an evolving question, and it’s an important question.”

That question may get an official answer from the IRS and Treasury, but probably not until they release the third or fourth tranches of proposed rules. Still, high-level economic data is already available, Kautter said, citing, for example, the Bureau of Labor Statistics.

The Push for More Data

Those advocating for more transparency for the incentives—including the U.S. Impact Investing Alliance and the Urban Institute—want more than just high-level data. They would like to know what the funds themselves are doing with the tax breaks, which the Joint Committee on Taxation estimated would cost $12.4 billion between 2018 and 2025 and then raise $10.8 billion in 2026 and 2027.

“What I have heard them say in public forums is they expect to have more thoughts on this in the fall,” said Urban Institute senior fellow Brett Theodos, referring to IRS and Treasury officials. “I would like to see some quick action here.”

Daniel Kowalski, counselor to Treasury Secretary Steven Mnuchin, said in March that the department needed to develop a way to collect data that can help the public accurately gauge the success or failure of the incentives, but won’t scare away investors by asking too much of them.

While officials deliberate, investors are diving in: There are already more than 100 funds with $23 billion in total investing capacity as of April 5, according a list compiled by San Francisco-based accounting and consulting firm Novogradac & Co. LLP, whose managing partner has met with OMB to make a case for more robust reporting requirements and some more fund-friendly rules.

Strict Interpretation

Some of those asking the IRS to mandate that funds report extensive information are optimistic, but the IRS has a reputation for strictly interpreting the statutes it administers.

IRS officials have, for instance, repeatedly said the agency has no power to provide an administrative fix for a well-known drafting error in the 2017 tax overhaul—despite loud and prolonged calls from the retail, restaurant, and construction industries, and evidence of congressional intent in the law’s conference committee report.

The opportunity zone reporting requirements are mentioned in the conference committee’s statement accompanying its report on the tax overhaul, but the language was removed from the Senate’s version of the bill before passage.

Treasury has been discussing its authority to gather and report data absent a statutory directive with OMB, Kautter said. Traditionally, he said, soliciting taxpayer information is an area on which the IRS and OMB have butted heads.

“If the IRS sort of strays beyond what folks consider to be tax administration matters, OMB has objected to including that in the form,” he said. “So now the tables are sort of reversed, in that people want a lot of information, and the IRS is saying, ‘Well, we don’t need it. We can administer the law just fine without some of this information that folks want.’”

Former acting IRS commissioner Steven Miller, now national tax director at alliantgroup LP, said the agency should have the general authority to request information that would justify funds’ getting the tax breaks—but little beyond that, and almost certainly not information on how the funds reshape the communities in which they invest.

The IRS could use its Statistics of Income program—which tracks aggregate amounts earned by various business structures and foreign subsidiaries of U.S. companies and other income trends—to provide a more complete picture, he added. But the IRS tends to release that data at least several years after the fact.

“The IRS is never contemporary in its information. It just isn’t,” Miller said. “That’s not how it was built. It’s built for three years later.”

Madrigal said Treasury could model opportunity zone reporting requirements after the requirements for the New Markets Tax Credit, which Treasury doles out to applicants seeking to invest in low-income communities. Treasury’s Community Development Financial Institutions Fund, which awards the credits, releases yearly reports detailing the aggregate award amounts, where the awardees are located, the economic characteristics of those areas, and the sectors the awardees invest in.

Legislative Effort

Sen. Cory Booker (D-N.J.), one of the two authors of the original opportunity zones legislation, is working on a bill that would require the Treasury Department to report to Congress on the effects of the tax breaks, according to a Senate staffer. Sen. Tim Scott (R-S.C.), the other originator of the opportunity zones bill, said his office is working with Booker’s on the effort.

The original version of the tax overhaul brought to the Senate floor included a requirement that the Treasury Department submit an annual report of how many tracts received opportunity fund investments, the funds’ asset classes, and poverty reduction and job creation as a result of the funds’ underlying businesses.

That provision was removed due to the constraints of the budget reconciliation process: Anything unrelated to taxes and government spending was gutted from the text.

House Democrats could have an appetite to add reporting requirements in order to monitor how the opportunity zone program is doing, said John Larson (D-Conn.), a member of the House Ways and Means Committee. Support would depend on what is included and how it is worded, he said.

“There are a lot of people who care about opportunity zones and even expanding activity in the zone itself to create economic development and job creation,” Larson said.

But a bipartisan push by Booker and Scott could take a while, as House Democrats are holding off on seeking changes to the 2017 tax law until after they have held multiple hearings on its effects.

“I think the most important thing is that everybody’s got to take a deep breath and then focus on what’s in the best interest of the American people,” Larson said. The plan to hold hearings on the law, he added, “could be a factor, because there is so much that’s in there and there are so many other concerns. It should be part of the mix.”

—With assistance from Allyson Versprille.

To contact the reporter on this story: Lydia O'Neal in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; Jeff Harrington at