IRS Proposes New Information-Reporting Rules for Qualified Opportunity Zone Funds

The IRS and Treasury Department published proposed rule REG-116506-25 in the Federal Register on September 11, 2026, under the formal title "Information Reporting Regarding Qualified Opportunity Zones and Updated Qualified Opportunity Fund Certification and Decertification Procedures" (RIN 1545-BR82, 26 CFR Parts 1 and 301). The rule converts the annual reporting mandates Congress wrote into the One Big Beautiful Bill Act (OBBBA) of 2025 into specific, enforceable line items: annual QOF returns listing asset values, NAICS codes, census tract data, employee counts, and investor disposition records. Penalties for willful failure reach $250,000 per return for funds with more than $10 million in gross assets. If you run or sponsor a Qualified Opportunity Fund, the comment period is open and the implementation clock is running.

From a Single Form to a Full Disclosure Regime

Under the original Tax Cuts and Jobs Act framework, a QOF manager's primary annual reporting obligation fit on a single IRS form. Form 8996, Qualified Opportunity Fund, asked two substantive questions: What is the total value of the fund's assets, and what portion constitutes qualified opportunity zone property? That thin reporting trail made it nearly impossible for Treasury to evaluate whether the billions flowing into QOFs were reaching the low-income communities Congress intended to serve. The Government Accountability Office flagged this transparency gap in successive reports, and practitioners knew the granular data simply was not being collected at the fund level.

Congress addressed that gap in the OBBBA, signed July 4, 2025. The legislation embedded new IRC §6039K and §6039L into the statute, establishing detailed annual reporting requirements for QOFs and Qualified Opportunity Zone Businesses. IRC §6726 created the penalty structure. The OBBBA also appropriated $15 million to the IRS to build out the enforcement infrastructure. Greenberg Traurig's July 2025 client alert on the OBBBA noted the legislation "adopts reporting requirements for QOFs and QOZBs, including penalties for failure to report," with mandatory reporting effective upon enactment.

REG-116506-25 translates that statutory text into operational form. The proposed rule, analyzed by tax practitioner Ed Zollars at Current Federal Tax Developments, specifies which data fields go on the new annual return, how certification works for post-2026 funds, and what conditions trigger a decertification review. The comment period opened September 11, 2026, and active QOF managers have a limited window to shape the final rule before it binds them.

The Data Categories Every QOF Return Must Now Include

The jump from Form 8996 to the new annual return is not incremental. Based on the OBBBA statutory text carried into REG-116506-25, the proposed return covers the following categories for every QOF and Qualified Rural Opportunity Fund (QROF).

Fund-level disclosures: The return must identify the fund by name, address, and taxpayer identification number, specify whether the entity is organized as a corporation or partnership, report the total value of all fund assets as of each relevant testing date, and separately report the value of qualified opportunity zone property held as of each testing date.

For each investment the QOF holds in qualified opportunity zone stock or a QOZ partnership interest, the return must include:

• Name, address, and TIN of the underlying corporation or partnership.
• NAICS code classifying the business activity of that entity.
• Census tract where the qualified opportunity zone business property is located.
• Dollar amount of the QOF's investment in that entity.
• Value of tangible property owned by the underlying business.
• Value of tangible property leased by the underlying business.
• Approximate count of residential units in any real property held by the business.
• Approximate average monthly full-time equivalent employee count.

For QOZ business property held directly by the QOF (not through a subsidiary entity), the return must separately disclose the applicable NAICS code, the census tract location, whether the property is owned or leased, the aggregate value at each testing date, and the residential unit count for any real property.

Disposition records: For each investor who sold or transferred a QOF interest during the tax year, the return must include that investor's name, address, and TIN, the date the interest was originally acquired, and the date of disposal. The QOF must also send each such investor a written statement with the fund's responsible reporting officer contact information and that investor's specific disposition data from the return.

Venable LLP's analysis of the OBBBA reporting requirements described these disclosures as adding "another layer of administrative burden and compliance cost" for program participants. For a fund holding three or four QOZ businesses across multiple census tracts, each with both owned and leased tangible property, the data collection exercise is categorically different from anything Form 8996 required. Western CPE's practitioner guide on the OBBBA provisions called the new §§6039K and 6039L regime "the most substantial compliance changes since the program's inception."

Certification and Decertification Under the Proposed Rule

REG-116506-25 goes beyond the annual return and updates the procedures by which an entity becomes, or ceases to be, a certified QOF. This matters because the OBBBA restructured the program around 10-year designation cycles, with new QOZ designations effective January 1, 2027, and the certification process needing to align with that timeline.

Under the original TCJA rules, a fund self-certified by attaching Form 8996 to its annual tax return. The proposed rule codifies updated procedures that distinguish between pre-2027 funds still operating under the legacy framework and post-2026 funds governed by the OBBBA's rolling five-year deferral structure. Sponsors launching new QOFs after January 1, 2027, will certify under the updated process, which the rule integrates with the new annual reporting return rather than treating certification and reporting as separate obligations.

On decertification, the proposed rule establishes clearer grounds and procedures for Treasury to revoke QOF status. Persistent failure to file the required annual return can be treated as a compliance failure that triggers the decertification review process, not merely a financial penalty event. For fund managers with institutional LP bases, a decertification notice creates LP-relations and legal exposure that dwarfs any direct penalty amount.

The Cherry Bekaert analysis of IRS Notice 2026-40 noted that the next 18 to 24 months represent a critical planning window as both old and new frameworks coexist. The certification update in REG-116506-25 is part of managing that coexistence cleanly. If you are running a fund certified under the old rules while evaluating a new fund launch for 2027, you will operate under two parallel certification regimes simultaneously.

The Penalty Structure You Need to Know

The OBBBA's penalty framework, codified in IRC §6726 and carried into REG-116506-25, is meaningfully stricter than anything in the prior program. The Shulman Rogers alert published on Mondaq framed it plainly: penalties can reach "$10,000 per return, or $50,000 for large funds with over $10 million in assets, with even higher penalties for willful violations." Here is the full structure:

• Late or incomplete annual return: $500 per day from the filing due date, capped at $10,000 for funds with $10 million or less in gross assets and $50,000 for funds above that threshold.
• Intentional disregard: $2,500 per day, with per-return caps rising to $50,000 (smaller funds) and $250,000 (funds above $10 million in gross assets).
• Inflation adjustment: All penalty amounts are indexed for inflation.

For a fund with $50 million in QOZ assets, a $250,000 penalty for willful failure to file is a material risk on a single annual return. The investor statement obligation creates separate exposure: failing to send the required statement to a disposing LP is its own compliance failure with its own penalty clock.

Western CPE's analysis flagged that the penalty regime is effective January 1, 2027. That date is your compliance deadline, not the final rule's publication date.

The Comment Period and Why It Matters for Fund Managers

Treasury's comment window typically runs 60 days for complex tax regulations, placing the deadline in mid-November 2026. Comments can directly shape the final rule, and past QOZ rulemaking demonstrates that practitioner input matters.

The 2018 and 2019 proposed regulations changed materially between proposal and the final rules in TD 9889, shaped in part by comments from fund sponsors and tax counsel. The NAICS-code scope, the investor statement mechanics, the decertification trigger conditions, and the format of the new annual return are all areas where operational experience from active QOF managers can produce a more workable final rule.

If your fund's accounting systems cannot produce the census-tract-by-census-tract and NAICS-by-NAICS disclosure the proposed return requires, that is precisely the feedback Treasury needs before the rule finalizes. The IRS Opportunity Zones guidance page, updated July 15, 2026, lists REG-116506-25's companion documents, including Notice 2026-40 and Revenue Procedure 2026-14. Work with tax counsel to identify which provisions create operational friction, document specific concerns, and submit a comment letter before the window closes.

Six Actions for QOF Managers Before December 31, 2026

The comment period, the January 1, 2027 effective date for the OBBBA's new QOF investment framework, and the December 31, 2026 recognition date for legacy deferred gains all run concurrently. Here is a concrete action sequence for the next three months:

• Audit your data infrastructure now. The new annual return requires NAICS codes, census tract identifiers, tangible property values (owned and leased separately), residential unit counts, and average monthly FTE data for each underlying QOZ business. Fund accounting systems built around Form 8996 do not capture this in reportable format.
• Identify 2026 LP dispositions. Any investor who sold or transferred a QOF interest in calendar year 2026 is already in scope for the written investor statement requirement. Build that identification into your year-end workflow now.
• Review the decertification provisions in REG-116506-25. If your fund operates close to the 90% asset test threshold, understand how persistent reporting failure could initiate a decertification review under the proposed framework, and what cure procedures are available.
• Engage tax counsel on the comment period before mid-November. If specific provisions in REG-116506-25 create operational burdens for your fund structure, document them with specifics and coordinate a comment letter submission. Targeted, fact-specific comments carry more weight than general objections.
• Brief your LPs on the December 31, 2026 inclusion date. The IRS guidance page confirms the legacy recognition date is unchanged by the OBBBA. Investors holding gains deferred under the original TCJA framework need to plan for that tax liability now.
• Design your 2027 fund structure around the updated certification procedures. If you are planning a new QOF launch for the post-2026 regime, do not use the old Form 8996 self-certification playbook. The updated procedures in REG-116506-25 govern new launches, and getting certification wrong at formation creates compounding compliance problems.

For more on this, see our related coverage:

• Qualified Opportunity Zones in 2026: The Tax Play Most Investors Get Wrong
• Opportunity Zones in 2026: What Investors Need to Know Before the Clock Runs Out

Frequently Asked Questions

Does REG-116506-25 apply to existing QOF investments made before 2027?

The proposed rule's new annual reporting return applies to all QOFs that remain active after the rule's effective date, including funds holding pre-2027 investments. However, the underlying tax consequences for gains deferred under the original TCJA framework are unchanged: those gains trigger recognition on December 31, 2026. The reporting mechanics are new. The tax treatment of pre-2027 investments is not.

What happens if a fund cannot file the annual return on time?

The penalty runs $500 per day from the filing due date until the return is filed, subject to a cap of $10,000 for funds with $10 million or less in gross assets and $50,000 for larger funds. The IRS can raise those caps to $50,000 and $250,000 respectively if it determines the failure resulted from intentional disregard. An incomplete return does not stop the penalty clock. The return must be substantially complete to count as filed under the proposed rule's standards.

Is the investor disposition statement a prescribed IRS form or a free-form document?

The proposed rule requires a written statement with specific data elements but does not prescribe a particular IRS form. Fund managers must provide the responsible reporting officer's contact information and the relevant disposition data from the annual return. Treasury may clarify the format in the final rule, and the comment period before mid-November 2026 is the right time to push for clarity.

How does the new certification process differ from the old Form 8996 self-certification?

The original TCJA program allowed self-certification by attaching Form 8996 to the annual return, with no separate IRS step. REG-116506-25 updates that process for post-2026 QOFs, integrating certification with the new annual reporting return and the OBBBA's 10-year designation cycle. For 2027 launches, certification status connects to ongoing reporting compliance rather than standing as a one-time election.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.