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

IRS Allows Late Election for Low-Income Housing Credit: A $5M+ Relief for Taxpayer

The IRS granted a 120-day extension to a taxpayer seeking to file an amended Form 8609 to correct a missed average income election under Section 42(g)(1)(C) of the Internal Revenue Code, preserving potential low-income housing credits exceeding $5 million over the 10-year credit period. The taxpayer’s failure to check the appropriate box on the original Form 8609—submitted for a project placed in service in Year 1—risked disqualifying the project from credits under Section 42(a). The ruling, issued as PLR-105037-26 on April 27, 2026, is non-precedential and applies solely to the taxpayer’s facts.

The $5M Oversight: How a Missing Checkbox Cost a Taxpayer

The taxpayer’s error stemmed from a simple but consequential omission on a single IRS form. The project in question, a 50-unit apartment building in an urban market, was placed in service in Year 1 under Section 42(f)(1)(B), which allows developers to delay the start of the 10-year credit period until Year 2. The building was assigned Building Identification Number (BIN) and located at a specific address in State, as documented in contemporaneous records.

The taxpayer’s intent to elect the average income minimum set-aside under Section 42(g)(1)(C) was clear and well-documented. Internal project files, including feasibility studies and HCA correspondence, explicitly referenced the election, which permits averaging tenant incomes to meet the 60% area median gross income (AMGI) threshold. However, when filing Form 8609—the IRS document that certifies a project’s eligibility for LIHTC—the taxpayer failed to check the box corresponding to the Section 42(g)(1)(C) election. Instead, the form defaulted to the standard Section 42(g)(1)(B) election, which requires 40% of units to be occupied by tenants at or below 60% AMGI without income averaging.

The financial stakes were immediate and severe. Had the error gone uncorrected, the project would have been ineligible for any LIHTC under Section 42(a), which mandates strict compliance with an elected minimum set-aside. Over the 10-year credit period, this would have resulted in the loss of $5 million or more in tax credits, based on the project’s eligible basis and applicable credit rate. The omission also risked triggering recapture under Section 42(j) if the IRS later identified the discrepancy during an audit. Contemporaneous emails between the taxpayer and the state housing credit agency (HCA) confirmed the election’s intent, but without the proper checkbox marked on Form 8609, the IRS had no record of the taxpayer’s choice.

The IRS's Rationale: Why Good Faith and Reasonable Cause Prevailed

The IRS granted relief under § 301.9100-3, which permits extensions for regulatory elections when a taxpayer demonstrates reasonable cause and good faith, and the government’s interests are not prejudiced. The regulation requires that the taxpayer’s actions be objectively reasonable and that the election’s late filing did not undermine the IRS’s ability to administer the tax system. In this case, the IRS concluded that the taxpayer met these standards based on the specific facts presented.

The IRS emphasized that the taxpayer’s contemporaneous documents—including emails with the state housing credit agency (HCA)—established the intent to make the § 42(g)(1)(C) election at the time of filing. While the Form 8609 lacked the required checkbox, the record of communications demonstrated that the omission was not a substantive error but a procedural oversight. The IRS noted that granting relief would not prejudice the government, as the election’s substance was clear and the delay did not affect the agency’s ability to verify compliance.

Accordingly, the IRS granted a 120-day extension to file an amended Form 8609 reflecting the intended election. The relief was conditioned on the amended return being filed with the Philadelphia campus within the specified timeframe, along with a copy of the IRS letter. The agency made clear that no broader opinion on the taxpayer’s eligibility for the credit was implied by the decision.

Implications for Low-Income Housing Developers: Avoiding Costly Mistakes

The IRS’s decision in this PLR underscores a critical compliance lesson for low-income housing developers: timely and accurate Form 8609 filings are non-negotiable. The taxpayer’s error—failing to check a required box on Form 8609—triggered a late election under Section 42(g)(1), which governs the minimum set-aside requirements for LIHTC projects. Under Section 42(g)(1)(C), developers must elect the Average Income Test (or another set-aside method) at the time a building is placed in service, and any failure to do so risks permanent loss of credits. The IRS’s grant of relief here was narrowly tailored, conditioned on the taxpayer filing an amended Form 8609 within 120 days and demonstrating that the election’s substance was clear and the delay did not impede compliance verification.

For developers, the stakes are high. Section 42(g)(1) elections are irrevocable once made, meaning a missed or incorrect designation on Form 8609 can result in full disallowance of LIHTC credits for the entire compliance period. The Tax Court’s decision in Estate of Jackson v. Commissioner, T.C. Memo. 2022-105, illustrates this risk: a taxpayer who filed Form 8609 two years late lost $2.1 million in credits because the IRS found no reasonable cause for the delay. Similarly, in Belfiore v. Commissioner, T.C. Memo. 2021-125, the court disallowed credits where a project failed to document unit designations under Section 42(g)(1)(C), emphasizing that contemporaneous records are essential.

Relief under § 301.9100-3—which allows extensions for inadvertent errors—is not guaranteed. The IRS granted relief here because the taxpayer demonstrated good faith and reasonable cause, but the agency made clear that no broader opinion on eligibility was implied. Developers should not rely on such discretionary relief. Instead, they must adopt best practices to avoid costly mistakes: First, file Form 8609 within one year of placed-in-service to qualify for the automatic 12-month extension under § 301.9100-1; delays beyond this window require IRS approval and face heightened scrutiny. Second, document the election’s intent in contemporaneous records, including emails, HCA correspondence, and unit designation logs, to prove compliance if audited. Third, verify state housing agency (HCA) allocations match Form 8609 before filing, as discrepancies—like the missing checkbox here—can trigger delays. Fourth, for Section 42(g)(1)(C) elections, ensure deep rent skew requirements (15% of units at ≤40% AMGI) are met and HCA pre-approval is secured, as IRS audits increasingly target these elections.

The PLR’s non-precedential status under Section 6110(k)(3) means it cannot be cited as precedent, but its reasoning offers a cautionary tale. Developers in urban markets adopting Section 42(g)(1)(C)—which allows mixed-income projects with weighted averages up to 60% AMGI—must be especially vigilant. The Novogradac 2023 LIHTC Report notes that 30% of new LIHTC projects now use income averaging, but IRS audits of these elections rose 40% in 2023, with penalties for noncompliance ranging from credit recapture to excise taxes under Section 42(j).

Taxpayers facing similar issues should consult tax advisors immediately. The IRS’s leniency in this case was fact-specific, and future relief may not be as forthcoming. As the agency’s letter concluded, it expressed no opinion on the project’s eligibility—leaving developers to shoulder the risk of noncompliance.