IRS Modifies Determination Letter Process to Clear Backlog
Executive Director
On September 18, the IRS announced modifications to its determination letter process. Under the modified procedures, the determination letters ("DL") issued will no longer include the dates of adoption for plan documents or amendments.
Since the announcement of the modified DL process, the IRS has been issuing determination letters for ESOPs at a vastly accelerated pace, with service providers reporting dozens or hundreds of such letters received. The letters appear to be issued on a vastly expedited basis. Based on informal conversations with IRS agents and officials, ESOP practitioners are concerned that the ESOP plan documents were not (and will not be) completely reviewed before a letter is issued.
The IRS statement says that "determination letters are based on the facts and demonstrations presented to the IRS in connection with the determination letter application. Therefore, our processing change does not affect the scope of or reliance on a determination letter." However, if the failure to completely review the ESOP documents produces flawed determination letters, the determination letters may eventually prove of limited value in providing assurances to employers about the plan's status as a qualified ESOP.
If the new process for determination letters does make such letters less reliable, ESOP companies may have fewer tools for IRS audits and DOL investigations. ESOP companies have also used determination letters to satisfy the due diligence requirements of lenders and outside auditors.