Treasury, IRS Move to End Tax-Exempt Status for Discriminatory Practices in Private Schools

News Release from Department of the Treasury, September 3, 2026

WASHINGTON – The Department of the Treasury and the Internal Revenue Service (IRS) have issued proposed regulations to end federal tax-exempt status for private schools that engage in racial discrimination, delivering on President Trump’s Executive Orders ending discrimination and restoring merit-based opportunity.

“Under President Trump, this Administration is standing up for America’s students by ensuring racial discrimination has no place in American education,” said Treasury Secretary Scott Bessent. “Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature. Today’s Treasury and IRS proposed regulations establish a clear standard, and the institutions that continue to use discriminatory practices will no longer receive the benefits of federal tax-exempt status.”

“Private educational institutions that promote discriminatory practices will no longer be afforded the benefits of federal tax-exempt status,” said IRS Chief Executive Officer Frank J. Bisignano. “Today’s proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status.”

BACKGROUND

Federal law provides tax-exempt status to organizations that operate exclusively for charitable and educational purposes. For decades, the Supreme Court has recognized that eligibility for tax-exempt status is conditioned on compliance with fundamental public policy, including the prohibition against racial discrimination.

The proposed regulations update Treasury and IRS guidance to reflect that longstanding principle, as established in Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard, and provide greater clarity for private educational institutions regarding the nondiscrimination requirements associated with federal tax-exempt status. 

PROPOSED REGULATIONS

Under the proposed rule, a private school would not qualify for Federal tax-exempt status under section 501(c)(3) if it adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin. The rule would apply across admissions, educational policies, scholarships and loans, athletics, and every other school-administered or school-supported program.

 The proposed regulations would apply to tax-exempt private primary and secondary schools, colleges, universities, professional schools, and trade schools. Treasury and the IRS estimate that the proposal may affect as many as 18,000 private educational institutions.

The proposal would also eliminate outdated provisions of IRS guidance that permitted schools to favor certain racial preferences in admissions, facilities, programs, scholarships, and financial assistance.

 Treasury and the IRS have concluded that these provisions are inconsistent with a uniform nondiscrimination standard and are incompatible with the Supreme Court’s case law.

The proposal would not prevent a private school from maintaining a religious mission, curriculum, or program of religious observance. Religious schools may continue to select students based on genuine religious affiliation or membership to remain consistent with existing federal law.

The proposal allows schools to continue expanding educational opportunity to assist disadvantaged students using race-neutral criteria such as family income, geographic location, first-generation status, individual hardship, military family status, or academic achievement when awarding admission or financial assistance. However, schools may not make decisions or confer benefits on the basis of race, color, or national or ethnic origin.

The final regulations would apply to taxable years beginning on or after May 31, 2027, providing affected institutions with sufficient time to review and update their policies to bring admissions, scholarship, and other policies into compliance.

The proposed regulations are available here.

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BACKGROUND: Kamehameha Admissions:  Without Affirmative Action Defense, Who Needs Victimology?

AP: Trump Administration Aims To Strip Tax Status Of Private Schools With DEI Policies