How to Prevent Problems When Owners Forget to Elect Minimum Set-Aside

Every tax credit site must meet and maintain a “minimum set-aside” throughout the 15-year compliance period to qualify for the tax credit program. To meet the set-aside, you must rent a certain percentage of the units in your building or site to qualified low-income households.

All tax credit owners must formally notify the IRS of their minimum set-aside election for their building or site when they file IRS Form 8609. If an owner doesn’t elect a set-aside on this form, all the tax credits the owner was allocated for its site may be lost.

That’s why it’s important to do whatever you can to make sure that your site’s owner elects a minimum set-aside when filling out this form. But if you discover that the owner didn’t elect a set-aside, you can still help the owner avoid losing its tax credits. Here are three steps you should take.

Step #1: Remind Owner that Line 10(c) of Form 8609 Is Crucial

If you start managing a tax credit site during its development phase, make sure the owner knows how important it is to make its set-aside election on Form 8609 by checking the appropriate box on line 10(c). When it comes time to file the form, some owners simply forget to check a box. Other owners think it’s not necessary to do so because they already agreed to a set-aside with their state housing agency. But it’s important to convey to owners that not making this election properly could jeopardize their tax credits.

Step #2: Check Form 8609 Once It’s Filed

Once the Form 8609 is filed, review a copy of it to make sure that the owner has checked the appropriate box in line 10(c). Don’t assume that everything is in order because the owner appears to be very professional or because you reminded the owner to make the set-aside election.

Also, keep in mind that, although completing and filing Form 8609 is the owner’s and not the manager’s responsibility, you’ll make a good impression if you spot an important oversight on the part of the owner that could endanger its tax credits. Besides, if the owner can’t claim any of the credits it’s been allocated, you may be out of a job.

Step #3: If Owner Didn’t Make Election, Tell It to Request Extension

If you discover that the owner didn’t elect a minimum set-aside for your building or site when it filed Form 8609, tell the owner to ask the IRS for an extension right away. To do this, the owner must formally request a private letter ruling (PLR) on whether it can get an extension of time to elect a minimum set-aside.

Under Section 301.9100-1(c), the IRS commissioner has the discretion to grant a reasonable extension of time under the rules set forth in Sections 301.9100-2 and 301.9100-3 to make a regulatory election or a statutory election (but no more than six months except in the case of a taxpayer who’s abroad).

To get an extension, an owner must show the IRS that it acted reasonably and in good faith and that its failure to elect a minimum set-aside on time wasn’t due to “willful neglect.” So if the owner of a site you manage has made an honest mistake and wasn’t trying to deceive the IRS, the IRS should give the owner the chance to correct its mistake with an amended Form 8609 within a certain number of days from the date the PLR was issued. PLRs aren’t law, but they do bind the taxpayers that request them. So if the owner of your site requests a PLR, it can safely rely on the ruling.

Because the procedure for requesting a PLR is complex, tell the owner to consult a tax credit attorney for help in writing a PLR request in the form the IRS requires. The attorney will give you advice on what relevant documents to gather along with information on required fees necessary for submitting the PLR request.