Legal Definitions - determination letter

determination letter

A determination letter is an official written response issued by the Internal Revenue Service (IRS) to a taxpayer's specific request. This letter provides the IRS's formal opinion or decision regarding the tax implications of a particular transaction, event, or the tax status of an organization or plan. It helps taxpayers confirm that their proposed actions or existing structures comply with tax law and will receive the anticipated tax treatment.

• Example 1: Retirement Plan Qualification

  A small business owner plans to establish a new 401(k) retirement plan for their employees. To ensure the plan is designed in full compliance with all IRS regulations and will qualify for the favorable tax benefits associated with such plans (like tax-deductible contributions for the employer and tax-deferred growth for employees), the business owner submits an application to the IRS. The determination letter they receive will confirm whether their specific plan document meets the necessary requirements for tax qualification.

  This example illustrates a taxpayer (the business owner) requesting an official IRS opinion on the tax significance (qualification for specific tax benefits) of a particular plan (the 401(k) retirement plan) before or shortly after its implementation.

• Example 2: Private Foundation Status

  A wealthy individual establishes a new charitable trust with a significant endowment, intending for it to operate as a private foundation. To ensure the trust is correctly classified under tax law and understands its specific operational and reporting obligations, the individual or the trust's administrators apply to the IRS. The determination letter issued by the IRS will officially confirm whether the trust is recognized as a private foundation for tax purposes, guiding its future compliance.

  Here, the taxpayer (the charitable trust) is seeking an IRS decision on the tax classification (private foundation status) of a newly formed entity, which dictates its ongoing tax responsibilities and privileges.