From time to time, a nonprofit organization has to prove that it does not have to pay federal income tax under section 501(c)(3) of the tax code. The first time that happens, the nonprofit can ask the Internal Revenue Service to rule on its status. If the IRS approves the request, it will issue a determination letter -- so named because it "determines" that the organization qualifies for the tax exemption.
The IRS issues a 501c3 determination letter when an organization applies for tax-exempt status. If the application is incomplete or the organization does not qualify, it might receive an "adverse determination" letter. However, if it shows it deserves the tax-exempt status, it will receive a determination letter that says so. This letter is an official legal document and proves that the organization does not have to pay federal taxes.
The most important part of the determination letter is the statement by the IRS that the organization qualifies for tax-exempt status under section 501(c)(3) of the Internal Revenue Code. The letter makes clear, however, that the determination is contingent on the organization's operating methods remaining the same as they are at the time of the application. In addition, if the organization accepts donations -- as in a charity or college, for instance -- the letter will explain that donors' contributions are tax-deductible, too.
An organization will normally use its determination letter as proof that it is an IRS-recognized nonprofit. For instance, when raising funds by soliciting contributions or applying for grants, the charity may be asked to prove its 501c3 status. A copy of the letter counts as this proof. The organization should provide a copy when requested, and not the original letter.
To qualify as for 501c3 status and receive a determination letter, an organization must operate as a nonprofit or not-for-profit. Most 501c3 organizations are charities, educational institutions or religious groups. The three main criteria for this status are: the organization must be formally organized -- as a corporation, for instance; it must meet operating criteria that include restrictions on lobbying and who can benefit from its income; and it must have at least one exempt purpose from a list that includes not just charity, education and religion, but science, literature and prevention of cruelty to animals, among others.
- IRS: Publication 557 -- Tax-Exempt Status for Your Organization
- IRS: Applying for 501(c)(3) Tax-Exempt Status (PDF)
- IRS: Exemption Requirements -- Section 501(c)(3) Organizations
- BoardSource: What Is an IRS Determination Letter?
- BoardSource: Can We Raise Money Before Receiving Our Determination Letter?
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