Generally, nonprofits seeking tax-exempt status must apply to be recognized as tax-exempt by the IRS. Specifically, nonprofits wishing to be recognized as a 501(c) organization are required (in most cases) to file a Form 1023 or 1024, Application for Recognition of Exemption, with the IRS within twenty-seven months of formation. After processing the nonprofit’s application, the IRS will issue a determination letter stating whether the nonprofit qualifies and is recognized as a 501(c) organization.
What is a Determination Letter?
The determination letter is a notice sent by the IRS to the nonprofit stating whether the organization meets the criteria to be exempt and whether the IRS formally recognizes it as exempt. The letter serves as proof of the nonprofit’s exempt status. The letter will state information such as the organization’s 501(c) status, a further classification if applicable (e.g., private foundation, public charity, etc.), and whether the organization is required to file annual information returns.
Why is a Determination Letter Important?
A favorable determination letter is official evidence of tax-exempt status. As such, the determination letter is one of the most crucial corporate documents for a tax-exempt organization. It not only validates the organization’s eligibility for tax benefits and contributions but also provides credibility and transparency to potential donors, supporters, and partners. Without this official recognition, nonprofits may face significant challenges in fundraising, receiving grants, and establishing trust with the community. Determination letters are also subject to public inspection rules as part of the 1023 and related correspondence.
What Happens if I No Longer Have My Determination Letter?
Without your determination letter, the nonprofit has no formal evidence of its exempt status, which may interfere with its ability to receive grants or contributions. Accordingly, your determination letter should be kept and safeguarded along with other corporate documents such as Articles of Incorporation, Bylaws, and corporate policies. In the event that your determination letter is lost or destroyed, you can request a copy from the IRS. For letters issued after January 1, 2014, the nonprofit can search for itself online using the IRS’s Tax-Exempt Organization Search and download it there. Otherwise, the nonprofit will need to submit a Form 4506-B to the IRS requesting a copy.
What Should I do if My Determination Letter has Outdated Information?
Over time, a nonprofit may change its name, address, or evolve to function for a different exempt purpose requiring a change in exempt status. When this happens, the nonprofit’s determination letter may need to be updated to reflect the nonprofit’s new name or status. If the nonprofit changes its name, it can request an affirmation letter confirming its exemption under the new name. If the nonprofit has substantially changed its activities or purposes, it will likely need to file a new application for exemption or request a miscellaneous determination, depending on the circumstances. In either case, the IRS will conduct a review and issue a new determination letter to the nonprofit.
A favorable determination letter is the best indicator of a nonprofit’s exempt status. The document is likely to be requested from potential grantors and donors as proof that the nonprofit is a 501(c) organization. Because of this, it is crucial that tax-exempt organizations safeguard their determination letter along with their other important corporate documents. While the organization can request a new copy if their determination letter is lost or destroyed, doing so can interfere with the nonprofit’s activities and ability to solicit grants and donations, as well as add unnecessary expense and headache for the organization.
Kyler Mejia is an attorney (bar pending) with Caritas Law Group P.C. Kyler advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide as well as donors with regard to major gifts. To schedule a consultation call (602) 456-0071 or email us through our contact form.