The penalty is basically interest, at a market rate, on the deferred tax. It is not that big of a deal.

QOFs that fail to maintain 90 percent of their assets in QOZ properties have to pay a penalty. How significant is this penalty, and how does it accrue if the failure to maintain sufficient assets continues over time?

The penalty is basically interest, at a market rate, on the deferred tax. It is not that big of a deal.

The penalty is computed in Form 8996 by month of default.

If the 90% test fails: Penalty under IRC section 6621(a) (2) 3% plus fed short term rate. Currently, the rate is 5% a year. 90% of assets less qualified assets times the 6621 rate. As an example: Total Assets $50 million. 90% of assets are $45 million. Total qualified assets $40 million. There is a $5 million shortfall. The monthly penalty is $20,833.33, $5,000,000 X (5% /12). If there is a penalty, the shortfall will be recalculated each month.

The penalty is based on a mathematical formula based on how far short the QOF has fallen of the 90% standard. The IRS underpayment rate (which I believe is 6% annually) gets applied to the difference. If a QOF fails the 90% test multiple times in a row, the IRS can decertify the QOF, though the IRS has not yet provided details about decertification. To answer the question more directly, you should be quite concerned about satisfying the 90% test, especially if you're syndicating, in which case failure of the 90% test can come with other repercussions based on your duties to your investors.

I would be a little concerned, but I think the first year if you show and document good-faith efforts, they may go easy.