Treasury and IRS Move to Strip Tax-Exempt Status From Schools That Consider Race, Affecting Up to 18,000 Institutions

The Treasury Department and the IRS issued proposed regulations on September 3 that would deny federal tax-exempt status under section 501(c)(3) to any private school that adopts, maintains or enforces a policy or practice discriminating on the basis of race, color, or national or ethnic origin. The rule would reach admissions, educational policies, scholarships and loans, athletics and every other school-administered program, and would cover private primary and secondary schools, colleges, universities, professional schools and trade schools. Treasury and the IRS estimate the proposal may affect as many as 18,000 institutions and would take effect for taxable years beginning on or after May 31, 2027.

The proposal would also eliminate existing IRS guidance that permitted schools to favor certain racial preferences in admissions, facilities, programs and financial assistance, which Treasury said is incompatible with a uniform nondiscrimination standard.

Treasury framed the rule as delivering on Trump's executive orders on discrimination and merit. Secretary Scott Bessent said schools rebranding race-based preferences as equitable or inclusive does not change their nature. Religious schools may still select students on genuine religious affiliation, and race-neutral criteria such as family income remain permitted.