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What is a Determination Letter?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 August 2014
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Determination letters are documents that are issued by the Internal Revenue Service in the United States. Essentially, the determination letter is an official decision on whether or not a retirement or pension plan put in place by an employer meets all the criteria established by the IRS for the structure and function of retirement plans. Generally, a determination letter is issued to either confirm the full compliance of the retirement plan or to advise the employer that the plan is not in compliance and that more work is needed before the plan can be officially sanctioned.

Obtaining a determination letter usually requires making contact with the district office of the IRS that covers the geographical location of the employer’s headquarters. The proposed pension or retirement plan is provided in full detail to the IRS. In turn, the IRS evaluates each aspect of the proposed plan and determines if the structure meets the current qualifications for approval. If everything is in order, the District Director issues a formal document that confirms the plan is in full compliance. Periodic reviews of the plan are conducted to make sure any changes to the basic structure are also in compliance with current criteria.

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Should the proposed plan not meet the current qualifications laid out by the IRS, the determination letter usually cites what areas of the plan are not in compliance. This makes it possible for the employer to go back and refine the current plan. Once the revised plan is ready, it is submitted to the IRS a second time. If all the open issues with the plan are addressed to the satisfaction of the IRS, a determination letter granting official approval of the plan is returned to the employer.

While the IRS may periodically review pension plans currently approved by a determination letter, it is usually wise for the employer to stay abreast of any changes in regulations that could impact the status of the plan. At the same time, it is also a good idea to consult the IRS about any proposed changes to the plan before implementing them. Doing so helps to ensure the plan operates well within the established qualifications.

Along with the official recognition of a retirement plan, the IRS also issues a determination letter to non-profit organizations to confirm their tax-exempt status. The text of the letter cites the section of the Internal Revenue Code applicable to the organization and serves as the official confirmation that the entity is recognized as a tax-exempt organization.

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Discuss this Article

allenJo
Post 3

@MrMoody - Yeah, the IRS tax exempt determination letter does more than tell you that you don’t have to pay taxes. It offers basic guidelines for how you are to conduct your operations.

For example, if you receive contributions it tells you that you have to report those contributions to your donors in the form of statements. It tells you about other record keeping requirements too.

I have a friend who started a nonprofit organization some time ago and that was one of the first pieces of business he took care of. He stores his letter in a safe place, too, because it’s a guarantee from the IRS that his organization is tax exempt.

MrMoody
Post 2

I was part of a small Asian church for some time in my community. When I say small, I mean it was less than 50 people maximum.

Nonetheless, it was assembled as a church and functioned as such. In the early days one of the first things we did was file for 501 C(3) status as a nonprofit organization. A few months later we received the 501 c 3 determination letter from the IRS wherein they recognized our nonprofit status.

They explained to us that we would be exempt from federal income taxes, but also pointed out that if our activities changed in any way we would become liable for paying taxes.

In other words, it’s not a permanent seal of approval. You have to continue to operate within certain guidelines to retain your nonprofit status.

Sinbad
Post 1

An IRS determination letter can be a good thing - I would have thought a letter from the IRS would have been a bad thing like a tax determination letter that says, "We have determined you should pay more taxes." or "We have determined that you must be audited!"

But to know that an IRS determination letter can be an IRS tax exempt determination letter is quite exciting. The people at the IRS do have parts of their job that don't involve bad news, and that has to be a good thing!

Has anyone here actually worked for the IRS or known anyone who worked for the IRS? In all of the people I know, and all of the different jobs they have, I have never met someone who worked for currently or has worked for the IRS. I wonder if it is difficult job to get.

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