IRS Grants Extension for Late REIT-TRS Election Due to Accounting Firm Oversight

REIT Misses Critical Election Deadline Due to Accounting Firm Error

The IRS granted a private letter ruling (PLR-119898-25) allowing a real estate investment trust (REIT) to retroactively elect its subsidiary as a taxable REIT subsidiary (TRS) under Section 856(l) of the Internal Revenue Code, despite missing the filing deadline. The taxpayer, a REIT organized in State 1, sought an extension to make the election effective as of Date 3, but the delay stemmed from an accounting firm’s oversight during routine quarterly tax planning meetings. The subsidiary, organized as a State 2 limited liability company on Date 2, had no prior activity before acquiring Facility on Date 3, triggering the need for TRS classification. The IRS’s decision hinged on the accounting firm’s failure to file Form 8875 (Taxable REIT Subsidiary Election) due to scheduling conflicts and miscommunication during the preparation of the REIT’s tax filings.

The Timeline: How a Routine Process Went Wrong

On Date 2, the REIT organized Subsidiary, a State 2 limited liability company wholly owned by the REIT. Subsidiary had no prior activity before its formation. On Date 3, the REIT acquired Facility through Subsidiary. Because Facility was leased to an operating entity providing services to tenants, the REIT intended to treat Subsidiary as a TRS effective as of Date 3, requiring the filing of Form 8875 (Taxable REIT Subsidiary Election) under § 856(l).

The REIT engaged Accounting Firm to prepare its tax returns and conduct quarterly tax planning meetings. Early in Year 2, Accounting Firm missed a scheduled meeting due to scheduling conflicts. On Date 4, more than 75 days after Date 3, the REIT notified Accounting Firm about Subsidiary’s formation and Facility’s acquisition. Accounting Firm then realized it had failed to file Form 8832 (Entity Classification Election) and Form 8875 for Subsidiary. The oversight was discovered after the filing deadline for elections effective as of Date 3 had passed.

On Date 5, Subsidiary filed Form 8832 to elect corporate tax treatment effective Date 3, seeking relief under Rev. Proc. 2009-41 for the late filing. The failure to file both forms timely resulted from the accounting firm’s scheduling conflict and subsequent miscommunication during tax filing preparation.

IRS Grants Relief Under § 301.9100-3: Key Factors in the Decision

The IRS granted a 90-day extension to file Form 8875 under § 856(l), effective as of Date 3, after the taxpayer demonstrated eligibility for discretionary relief under § 301.9100-3. The decision relied on five critical representations:

1. The request for relief was filed before the IRS discovered the untimely election.
2. Granting relief would not result in a lower aggregate tax liability for any affected year.
3. No accuracy-related penalty under § 6662 applied or could be imposed.
4. The failure to file was not intentional but stemmed from the accounting firm’s oversight.
5. No hindsight was involved in seeking relief.

The IRS confirmed the taxpayer acted reasonably and in good faith, as the delay resulted from an intervening event beyond their control—the accounting firm’s scheduling conflict and miscommunication. The ruling emphasized that the taxpayer did not ignore the deadline but relied on professional advice that failed to execute filings. Additionally, the IRS found no prejudice to Government interests, as the late election did not reduce tax liability and the statute of limitations under § 6501(a) had not expired.

The Rules: TRS Elections, Deadlines, and Late Relief

The Taxable REIT Subsidiary (TRS) election under § 856(l) permits a REIT to treat a subsidiary as a TRS, allowing non-qualifying activities without jeopardizing REIT status. The election is irrevocable unless both parties consent to revocation. To elect TRS status, the REIT and subsidiary must jointly file Form 8875 before the due date (including extensions) of the REIT’s tax return for the year the election takes effect.

Form 8875’s effective date is strictly limited: it cannot be more than 2 months and 15 days prior to the filing date or more than 12 months after the filing date. For example, a Form 8875 filed on March 15, 2026, could not have an effective date earlier than December 29, 2025, or later than March 15, 2027. The IRS enforces these limits strictly, as demonstrated in PLR-119898-25, where a late election was denied for failing to meet the 2-month/15-day rule.

The TRS election process differs from Form 8832 elections, which govern entity classification (e.g., corporation, partnership, or disregarded entity). Form 8832 must be filed within 75 days of formation, with late elections eligible for relief under Rev. Proc. 2009-41. Unlike Form 8875, Form 8832 is not subject to the 2-month/15-day or 12-month rules.

Taxpayers who miss regulatory election deadlines may seek relief under § 301.9100-3, which provides discretionary extensions for those who acted reasonably and in good faith. Relief is granted if the taxpayer demonstrates:

• Reasonable and good-faith efforts to comply.
• No prejudice to Government interests.
• No intent to exploit the late election (e.g., avoiding penalties or reducing tax liability).

The IRS considers the failure to file as reasonable and in good faith if it resulted from intervening events beyond the taxpayer’s control, such as reliance on a tax professional who failed to execute filings. Conversely, relief is denied for negligence, strategic delay, or hindsight. For REITs, strict adherence to deadlines and proactive monitoring of filing requirements are critical to avoid disqualification from REIT status or exposure to penalties.

What This Means for REITs and Their Advisors

The IRS’s decision in PLR-119898-25—where an accounting firm’s oversight was deemed an intervening event—offers both a warning and a limited safety net for REITs. While PLRs like this are non-precedential, they provide insight into how the IRS evaluates late elections under § 301.9100-3. REITs must recognize that PLRs are not a substitute for strict compliance with deadlines.

The ruling underscores the risks of outsourcing compliance to external advisors. The IRS granted relief because the delay resulted from an unforeseeable event beyond the taxpayer’s control—the accounting firm’s scheduling conflict and miscommunication. However, this does not absolve REITs of responsibility; election deadlines remain non-negotiable, and taxpayers bear ultimate accountability for timely filings.

To mitigate risks, REITs should adopt systematic safeguards:

• Checklist-driven processes tied to tax return due dates to ensure Form 8875 is filed alongside the parent REIT’s return.
• Automated reminders based on the REIT’s fiscal calendar to flag deadlines in advance.
• Secondary reviews by independent tax advisors or in-house counsel to catch errors before submission.

Documentation is critical for relief requests. REITs should maintain contemporaneous records of all interactions with advisors, including emails and engagement letters, to substantiate claims of reasonable cause. Without such evidence, relief under § 301.9100-3 is unlikely, as demonstrated in PLR 202245003 (2022), where the IRS denied relief due to insufficient documentation.

The stakes of a missed TRS election are high. Failure to elect TRS status risks disqualification from REIT status, loss of pass-through taxation, and exposure to corporate-level taxes. Even if disqualification is avoided, non-qualifying income may trigger additional tax liabilities and penalties under § 6662 for substantial understatement.

With the IRS increasingly scrutinizing REIT structures, compliance is paramount. The agency’s willingness to grant relief in PLR-119898-25 reflects recognition of human error—but only when taxpayers can prove they acted in good faith and took proactive steps to prevent mistakes. For REITs and advisors, the takeaway is clear: deadlines matter, documentation is essential, and preparation is non-negotiable.