IRS Grants Extension for Late Average Income Election Under Section 42(g)(1)(C)

IRS Allows Late Election for Low-Income Housing Credit Project

The IRS granted a taxpayer’s request for an extension to make a late average income minimum set-aside election under § 42(g)(1)(C) of the Internal Revenue Code, allowing the taxpayer to file an amended Form 8609 within 120 days of the ruling. The taxpayer inadvertently failed to make the election on the original Form 8609 submitted to the IRS Philadelphia campus, despite contemporaneous documents indicating the intent to elect the average income test. The IRS concluded that the taxpayer demonstrated reasonable cause and good faith under §§ 301.9100-1 and 301.9100-3, justifying relief despite the missed deadline. The stakes were high: without the election, the project risked disqualification from claiming Low-Income Housing Tax Credits (LIHTC) for the taxable year, potentially forfeiting millions in credits and jeopardizing compliance with the 15-year extended use period under state allocation plans. The IRS’s decision hinged on the taxpayer’s ability to prove that the oversight was not due to willful neglect but rather an administrative error, underscoring the agency’s willingness to provide relief for unintentional compliance failures in high-stakes LIHTC projects.

The Taxpayer's Oversight: A Costly Mistake

The taxpayer, a developer of a low-income housing project in State, inadvertently failed to make the average income minimum set-aside election under Section 42(g)(1)(C) of the Internal Revenue Code when filing Form 8609. The Project, consisting of N buildings placed in service in Year, was designed to utilize the Average Income Minimum Set-Aside (AIMSA) election to comply with LIHTC requirements. The AIMSA election allows projects to average tenant incomes across units, provided at least 40% of units are rent-restricted and the average income does not exceed 60% of Area Median Gross Income (AMGI).

Despite the taxpayer’s intent to make the election—evidenced by contemporaneous documents—the oversight occurred on the submitted Form 8609, which is the IRS form required to claim Low-Income Housing Tax Credits (LIHTC). The failure to elect AIMSA on the form meant the project defaulted to the standard 20-50 or 40-60 test under Section 42(g)(1)(A) or (B), potentially disqualifying it from the more flexible AIMSA framework. Without the election, the project risked forfeiting millions in LIHTC credits and jeopardizing compliance with the 15-year extended use period mandated by state allocation plans. The error, though administrative, carried severe financial and compliance consequences for the taxpayer’s ability to claim credits for the taxable year.

The IRS's Rationale: Reasonable Cause and Good Faith

The IRS granted the taxpayer’s request for an extension under § 301.9100-3(a), which permits relief for late regulatory elections when the taxpayer demonstrates reasonable cause and good faith and the government’s interests are not prejudiced. The agency concluded that the taxpayer satisfied the dual requirements of §§ 301.9100-1 and 301.9100-3 based on the record submitted.

Under § 301.9100-1, the IRS may provide an automatic 6-month extension for certain late elections if the taxpayer acted reasonably and in good faith, and the delay did not prejudice the government’s interests. The regulation defines “reasonable cause” as conduct that reflects a sincere effort to comply with the tax laws, even if the effort fell short due to administrative error or miscommunication. The IRS emphasized that the taxpayer’s failure to timely file the election was not due to willful neglect or tax avoidance, but rather an oversight in administrative coordination.

The IRS further relied on § 301.9100-3(a), which grants discretionary relief for late elections not eligible for automatic relief under § 301.9100-1. To qualify, the taxpayer must submit clear and convincing evidence that the delay was caused by circumstances beyond their control and that the election was made as soon as practicable after the impediment was removed. The agency found that the taxpayer’s submission established both elements: the delay stemmed from an administrative misstep in coordinating with the state housing finance agency, and the corrected election was filed promptly once the error was identified.

The IRS’s decision hinged on the taxpayer’s proactive response after discovering the omission. The agency noted that the taxpayer did not attempt to conceal the error or delay disclosure, and instead sought relief immediately upon recognizing the issue. This conduct supported the conclusion that the taxpayer acted in good faith and with reasonable diligence under the circumstances.

In granting the extension, the IRS emphasized that no prejudice to the government’s interests would result from the relief. The agency determined that the delay did not affect the substantive compliance of the project or the government’s ability to verify eligibility for the Low-Income Housing Tax Credit. The corrected election, filed within 120 days of the IRS’s letter, preserved the project’s compliance with § 42(g)(1)(C) and ensured continued eligibility for the AIMSA framework.

The IRS’s conclusion reflects a fact-specific analysis in which the taxpayer’s transparency, prompt corrective action, and lack of culpability outweighed the procedural lapse. The decision underscores the IRS’s willingness to grant relief in cases where the taxpayer demonstrates sincere efforts to comply, even when administrative errors occur.

What This Means for Low-Income Housing Credit Projects

The IRS’s recent private letter ruling underscores the critical importance of timely elections under § 42(g)(1), which governs the minimum set-aside requirements for low-income housing credit projects. Projects must elect either the 20-50 test (20% of units at ≤50% of Area Median Gross Income) or the 40-60 test (40% of units at ≤60% of AMGI) by the due date of the tax return for the year the project is placed in service. Failure to make this election on time risks disqualification from the credit program entirely.

The ruling also highlights the flexibility and complexity of the Average Income Minimum Set-Aside Election (AIMSA), introduced by the 2018 Consolidated Appropriations Act. AIMSA allows projects to average tenant incomes across units, provided that:

• At least 40% of units are rent-restricted.
• The average income does not exceed 60% of AMGI.
• No unit exceeds 80% of AMGI.

This election offers significant advantages for mixed-income developments, enabling developers to serve a broader range of incomes while maintaining compliance. However, it also introduces heightened recordkeeping burdens, as projects must annually certify compliance with the average income test under Revenue Procedure 2019-39. The IRS’s willingness to grant relief in this case reflects its recognition of the practical challenges developers face in navigating these requirements, but it does not diminish the strict procedural deadlines that govern LIHTC compliance.

For other taxpayers in the low-income housing credit industry, this ruling serves as a cautionary tale about the consequences of administrative oversights. The IRS’s decision to grant relief under § 301.9100-3 was contingent on the taxpayer’s demonstrated good faith, prompt corrective action, and lack of culpability—factors that are not guaranteed in every case. Taxpayers seeking similar relief must be prepared to provide detailed documentation of their efforts to comply, including correspondence with state housing finance agencies (HFAs), tax advisor consultations, and internal compliance protocols.

The IRS’s discretion under § 301.9100-3 is highly fact-specific, and relief is not guaranteed for procedural lapses. The ruling’s non-precedential nature means it cannot be cited as binding authority, but it offers valuable guidance for practitioners navigating similar situations. Taxpayers should consider the following key takeaways when evaluating their own compliance with LIHTC requirements:

First, timeliness is non-negotiable. The IRS’s willingness to grant relief in this case does not alter the strict deadlines for elections under § 42(g)(1). Projects must file Form 8609 (the Low-Income Housing Credit Allocation and Certification) by the due date of the tax return for the year the project is placed in service. Late filings risk disqualification from the credit program, as the IRS has no tolerance for willful neglect in meeting these deadlines.

Second, documentation is essential. The IRS’s decision hinged on the taxpayer’s ability to demonstrate transparency, prompt corrective action, and a lack of culpability. Taxpayers should maintain comprehensive records of all communications with state HFAs, tax advisors, and internal compliance teams. This includes emails, meeting notes, and signed penalty-of-perjury statements, which can serve as evidence of reasonable cause in the event of a late election.

Third, AIMSA elections require meticulous planning. While AIMSA offers greater flexibility for mixed-income projects, it also introduces complex compliance obligations. Projects must designate income limits for each unit at 10% increments (e.g., 30%, 40%, 50% AMGI) and annually recertify tenant incomes to ensure compliance with the average income test. The IRS’s increased scrutiny of AIMSA projects means that errors in unit designation or income averaging can trigger audits, recapture of credits, or penalties.

Finally, state HFAs play a critical role in the LIHTC compliance process. Delays in Form 8609 issuance or miscommunication between developers and HFAs can lead to missed deadlines and administrative errors. Taxpayers should proactively engage with their state HFAs to ensure that elections are made on time and that all required documentation is submitted before IRS deadlines.

In summary, this ruling serves as a reminder of the IRS’s willingness to grant relief in cases of good faith compliance efforts, but it also underscores the high stakes of procedural errors in the LIHTC program. Taxpayers must prioritize timely elections, meticulous recordkeeping, and proactive engagement with state HFAs to avoid disqualification from the credit program. While the ruling provides valuable guidance, it does not alter the strict compliance requirements that govern LIHTC projects.

Key Takeaways for Tax Practitioners

The IRS’s decision in this PLR underscores a critical lesson for practitioners: elections under § 42(g)(1) for the Low-Income Housing Tax Credit (LIHTC) are not merely procedural—they are dispositive. The ruling highlights that the average income minimum set-aside election (AIMSA) must be made by the due date of the tax return for the year the project is placed in service, and that retroactive approvals from state HFAs do not cure a missed deadline. Tax practitioners must treat Form 8609—the document that allocates and certifies LIHTC credits—as sacrosanct. A single oversight in filing or designating the election can disqualify an entire project from credits, as the IRS has no tolerance for late or improperly documented elections absent extraordinary circumstances.

The IRS’s willingness to grant relief under § 301.9100-3 in cases of reasonable cause and good faith is not a substitute for diligence. Practitioners should view this relief as a last resort, not a safety net. To qualify, taxpayers must demonstrate that the failure to timely elect was due to circumstances beyond their control, such as an HFA’s administrative delay or a documented miscommunication with state authorities. The IRS’s denial of retroactive HFA approvals in prior PLRs (e.g., PLR 2020-50008) makes clear that self-help remedies are ineffective. Practitioners must therefore double-check every election on Form 8609—including the AIMSA designation—before the filing deadline, and maintain contemporaneous records of all communications with state HFAs to preemptively address potential disputes.

When relief is necessary, the path is narrow. Taxpayers seeking discretionary relief under § 301.9100-3 must file a written request with the IRS, accompanied by a penalty of perjury statement and supporting documentation proving reasonable cause. The IRS’s PLR-104808-26 explicitly states that the ruling is not precedential under § 6110(k)(3), reinforcing that each relief request is evaluated on its own facts. Practitioners should prepare these requests with the same rigor as a court filing, including detailed timelines of the delay, evidence of good faith efforts to comply, and third-party corroboration (e.g., HFA correspondence or tax advisor memos). The IRS’s denial of relief in cases of negligence—such as failing to monitor HFA processing times—demands that practitioners proactively track election deadlines and escalate issues immediately if delays arise.

Finally, this PLR serves as a cautionary tale about the limitations of PLRs as precedent. While the ruling provides valuable insight into the IRS’s interpretation of § 42(g)(1) and § 301.9100-3, it is binding only on the requesting taxpayer. Tax practitioners cannot rely on similar PLRs to assume the IRS will grant relief in analogous situations. The IRS’s Associate Chief Counsel (Energy, Credits, & Excise Tax) issued this ruling under PLR-104808-26, but the agency’s position may evolve with new guidance or legislative changes. Practitioners must therefore stay abreast of Revenue Procedures and IRS memos—such as Rev. Proc. 2019-39 for AIMSA compliance or Rev. Proc. 2023-34 for annual recertification requirements—and adapt their strategies accordingly. The stakes are high: a missed election or improperly filed Form 8609 can result in credit recapture, penalties under § 6651(a)(1), and disqualification from future LIHTC allocations. In the LIHTC program, procedural precision is non-negotiable.