Treasury and IRS Propose Rule to Strip Tax-Exempt Status From Private Schools Over Racial Discrimination

WASHINGTON -- The Treasury Department and the Internal Revenue Service issued a proposed rule Wednesday that would revoke federal tax-exempt status from private schools that engage in racial discrimination, a move the administration says fulfills executive orders against race-based preferences in education.

<cite index="9-1">The two agencies issued the 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,</cite> according to an IRS news release reviewed by ETL Newswire.

<cite index="9-4,9-5">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.</cite>

<cite index="9-6,9-7">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.</cite>

Treasury Secretary Scott Bessent framed the rule as a direct response to schools that have nominally wound down diversity programs while continuing the same practices. <cite index="15-4">According to Bessent, the move is designed to go after schools that have claimed to get rid of their DEI departments and policies but in reality have only hidden them from public scrutiny.</cite>

<cite index="12-5,12-6">IRS Chief Executive Officer Frank Bisignano said in Thursday's news release that "private educational institutions that promote discriminatory practices will no longer be afforded the benefits of federal tax-exempt status" and that "schools that continue to engage in racial discrimination should expect to lose that status."</cite>

<cite index="16-4,16-5">Tax-exempt status is vital for schools, enabling donor deductions, lower borrowing costs, and tax-free endowment earnings. Losing it would impose severe financial strain, making institutions taxable entities and increasing operational costs.</cite>

The proposal drew sharp criticism from higher education groups. <cite index="26-4,26-5">Todd Wolfson, president of the American Association of University Professors, called the rule "blatantly racist political coercion," saying the administration was "weaponizing the I.R.S. to attack colleges and universities that uphold and expand civil rights."</cite>

<cite index="19-5">The proposed rule makes clear that race-based practices intended to further remedial or diversity-related objectives would be treated as discrimination for purposes of the rule.</cite> The proposal does not affect schools that select students on the basis of religious affiliation.

The rule fits a broader pattern of federal education enforcement. <cite index="19-8">In June 2026, the Department of Justice announced investigations into 15 medical schools after stating that investigations of two other institutions found they had illegally used race in admissions.</cite> <cite index="23-8">Federal civil rights investigators have also opened inquiries into admissions practices at Harvard, Yale, and other schools.</cite>

<cite index="13-3">Treasury said the proposed regulations update guidance to reflect principles established in Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard.</cite>

<cite index="10-1,10-5">The regulations would apply to private primary, secondary, preparatory, or high schools, as well as colleges and universities, for taxable years beginning after May 31, 2027, which is after the final regulations are expected to be published.</cite>

<cite index="20-8">Comments are due by November 3, 2026, via Regulations.gov under docket REG-119986-25, and Treasury expects to finalize the rules before May 31, 2027.</cite>

<cite index="25-7">The rule faces a notice-and-comment period and likely legal challenges.</cite> The AAUP did not respond to a request for additional comment Thursday.

Sources cited:
- IRS Newsroom (IR-2026-103) (https://www.irs.gov/newsroom/treasury-irs-move-to-end-tax-exempt-status-for-discriminatory-practices-in-private-schools)
- U.S. Department of the Treasury Press Release (https://home.treasury.gov/news/press-releases/sb0621)
- Federal Register (REG-119986-25) (https://www.federalregister.gov/documents/2026/09/04/2026-18127/racial-nondiscrimination-in-private-schools)
- CNBC (https://www.cnbc.com/2026/09/03/treasury-irs-proposal-tax-exempt-schools-charitable-donations.html)
- Idaho Public Press (https://idahopublicpress.com/proposed-irs-rule-could-end-tax-exempt-status-for-schools-with-race-based-programs/)
- Feldesman (legal analysis) (https://www.feldesman.com/proposed-rule-puts-tax-exempt-status-at-risk-for-private-educational-institutions-engaging-in-dei-practices/)
- Forbes (https://www.forbes.com/sites/nathangoldman/2026/09/03/irs-just-put-18000-private-schools-tax-exempt-status-on-notice/)
- The College Investor (https://thecollegeinvestor.com/87796/irs-proposes-ending-tax-exempt-status-for-18000-private-schools-over-race-based-policies/)