Dubro makes a 1/2" extension for that engine. Put it on and the muffler will no longer "run into the fuselage". However, I'd suggest....

If the lightening hole is right where the muffler hits, I'd go inside and epoxy a sheet of lightply or strong balsa over the hole. Trim the covering, fuelproof whatever is still raw wood, and you've got an instant clearance of however thick the fuselage is right there. It's easy and quick.

If the lightening hole isn't exactly where you need the clearance, I'd still use the hole as the starting point to remove a bit of fuselage "skin" to provide the clearances needed. Placing a sheet of thin plywood or thicker lightply over whatever fuselage side you remove is going to actually improve the nose of the model right where it could probably use some improvement.

It's sort of interesting to hear that there is a lightening hole right down where the landing gear is supported and immediately behind where they expect many people to have their mufflers. Your uploaded picture that indicates where the hole is is amazing. Just having balsa there would have strengthened the gear a fair amount. It's amazing they'd have felt the need to lighten the model up in an area that is usually strengthened. It's also amazing that they think an oracote skin is going to keep all the crud and fuel that's blowing around behind the engine wouldn't defeat a thin film of covering. After seeing the insides of a couple of Phoenix models, and seeing a bunch of them with really heavy construction in fuselages that were built with components that Phoenix hid with 2.5 ounce lead weights in the nose.......... It's amazing they have a design they think they will build with the need for lightness in the nose.

I'd check the balance of the model to see if adding a sheet of ply inside that hole is going to have any affect that can't be easily worked out. If it was my model, I'd rather not have a hole there that is only covered by oracoat. And a thin sheet of ply won't add much weight anyway. The area actually is relatively close to the CG anyway.

How heavy is the model going to be when it's done? Do you already know that it's going to be nose heavy?