18,000 Schools Face Tax-Exempt Risk Under IRS Rules Targeting Diversity Initiatives

The Treasury Department and IRS proposed regulations Thursday that could put the federal tax exemptions of as many as 18,000 private educational institutions at risk. The proposal targets policies that discriminate on the basis of race, color, or national or ethnic origin.

The affected institutions could include high schools, universities, professional schools, and trade schools. Covered activities include admissions, scholarships, athletics, and other school-administered or school-supported programs.

Treasury Secretary Scott Bessent said schools could not avoid the rule by changing the language around race-conscious policies.

“Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature.”

The proposed rules would apply to taxable years beginning after May 31, 2027, if the agencies finalize them as written. They would allow the government to deny or revoke federal tax-exempt status for private schools, colleges, universities, and trade schools that use race-based preferences in covered programs.

The estimate includes about 750,000 students who could be affected through scholarships tied to race, ethnicity, or national identity. The proposal is identified as REG-119986-25 and is scheduled for publication in the Federal Register on September 4, 2026.

The IRS Chief Executive Officer Frank J. Bisignano said the measure was intended to warn schools before the proposed restrictions take effect.

“Today’s proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status.”

The proposal reaches beyond admissions decisions

The proposal covers more than the process of selecting students. It also identifies scholarships, loans, athletics, facilities, and other school-run or school-supported programs.

The text says race-based benefits in admissions, scholarships, and facilities “would be incompatible” with tax exemption. It also treats discrimination “for any purpose” as disqualifying.

That language places school-administered benefits and facilities alongside admissions policies in the proposed nondiscrimination analysis. Schools that continue the practices could face the loss of federal tax exemption rather than only a program-specific penalty.

The agency would remove an older safe harbor

The proposal would revise the IRS approach to private-school exemption under Section 501(c)(3). It would fold race-based diversity, equity, and inclusion preferences into the tax agency’s analysis of whether an institution qualifies for exemption.

It would also remove long-standing safe-harbor guidance in Revenue Procedure 75-50. That guidance has covered race-conscious admissions and financial aid programs.

The administration has described the move as an escalation of its campaign against diversity, equity, and inclusion programs in education. The proposal’s reach includes policies that schools may describe as diversity programs, although the agencies frame the issue as racial discrimination.

The agencies cite a 1983 Supreme Court precedent

The proposal relies on the “fundamental public policy” against racial discrimination in education. It cites the Bob Jones University precedent and developments following SFFA.

The agencies present the changes as a more explicit application of that policy to private educational institutions. The proposal also follows the Supreme Court’s 2023 ban on race-conscious admissions.

The rule could provide the administration with another route to challenge universities it says violate that ruling. That possibility has drawn particular attention in discussions involving Harvard.

The rule still faces a formal path before enforcement

The proposal must pass through notice and comment before the Treasury Department and IRS can finalize it. The process leaves the text subject to change.

If finalized as proposed, the sequence would be:

1. The proposal would proceed through the notice-and-comment process.
2. The agencies would issue a final rule.
3. The rules would apply to taxable years beginning after May 31, 2027.
4. Private schools that continue race-based preferences in covered programs could face loss of federal tax-exempt status.

Bisignano said schools that promote discriminatory practices “will no longer be exempt from taxes.” The IRS issued the related release, IR-2026-103, on September 3, 2026.

This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.