This study investigates the effect of Fe(3+) on the electronic structure of nanocrystalline ceria. Systematic synchrotron X-ray absorption spectroscopy coupled with scanning transmission electron microscopy/electron energy loss spectroscopy was utilized. The oxygen vacancies can be engineered and their number varied with the degree of iron doping. Comparing the local electronic structure around Ce sites with that around Fe sites reveals two stages of defect engineering. The concentration of Ce(3+) and the distribution of defects differ between lower and higher degrees of doping. Charge is transferred between Ce and Fe when the doping level is less than 5%, but this effect is not significant at a doping level of over 5%. This transfer of charge is verified by energy loss spectroscopy. These Fe-modified ceria nanoparticles exhibit core-shell-like structures at low doping levels and this finding is consistent with the results of scanning transmission electron microscopy/electron energy loss spectroscopy. More Fe is distributed at the surface for doping levels less than 5%, whereas the homogeneity of Fe in the system increases for doping levels higher than 5%. X-ray magnetic circular dichroism spectroscopy reveals that Ce, rather than Fe, is responsible for the ferromagnetism. Interestingly, Ce(3+) is not essential for producing the ferromagnetism. The oxygen vacancies and the defect structure are suggested to be the main causes of the ferromagnetism. The charge transfer and defect structure Fe(3+)-Vo-Ce(3+) and Fe(3+)-Vo-Fe(3+) are critical for the magnetism, and the change in saturated magnetization can be understood as being caused by the competition between interactions that originate from magnetic polarons and from paired ions.