The regulations do not provide a reasonable cause to avoid the penalty if after all the safe harbors the QOF still does not meet the 90% test.
Ask A Question
How can I show reasonable cause to avoid the penalty for failing to have 90 % of my QOF’s assets in an OZ?
What is considered reasonable cause and how can I prove it? Is there a form?
Answers
There's a form to be filed with the IRS to claim reasonable cause. Typically speaking, reasonable cause is based on some combination of a good-faith effort to comply and circumstances outside the taxpayer's control.
There is no form. If you know going in that you will not be able to meet the 90% asset test, then it is probably not reasonable cause. You should have a good faith intention to comply.
Reasonable cause will generally be based upon the individual facts and circumstances of the taxpayer. There is currently no standardized methods to show reasonable cause. An example could be an "act of God" beyond your control, or potentially even a clerical error.
This problem will be hashed out over time. The key is not to be a pioneer in testing the issue. Once the funds are in the Qualified Opportunity Fund, they are invested. The best way to prove you comply is maintain specific business records about the zones you operate with audited financials that demonstrate where the funds are being deployed. Reasonable cause is typically along the lines of would the ordinary, reasonable prudent person find reasonable cause or not. So really it is in the factually supported presentation of your fund.
There is no current guidance on what constitutes reasonable cause. However, in other areas the IRS will generally grant relief if the testing failure was beyond the taxpayer’s control, so document any issues which arise.
Third-party governmental delay.
Neither the IRS nor Treasury have issued any rules on what constitutes reasonable cause yet.
There isn't a form for this, and "reasonable cause" hasn't yet received any further definition from the IRS. I'd recommend documenting all the steps you took with intent to meet the 90% threshold, and anything that occurred outside your control which kept you from satisfying it during the current testing period.
There is no form, but if a penalty is applied, you can prepare a statement of reasonable cause on how you made best efforts to comply but were unable due to incorrect guidance from your advisor, or other enumerated reasons used for IRS reasonable cause. Google IRS reasonable cause exceptions and you'll see many.
DISCLAIMER:the information found on this website is intended to be general information; it is not legal or financial advice. Specific legal or financial advice can only be given by a licensed professional with full knowledge of all the facts and circumstances of your particular situation. You should seek consultation with legal and financial experts prior to participating in any aspect relating to Opportunity Zones. Posting a question on this website does not create an attorney-client relationship. All questions you post will be available to the public; do not include confidential information in your question.