Treasury and IRS proposed stripping tax-exempt status from 18,000 private schools over race-conscious policies

On September 3, 2026, the U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations (IR-2026-103) that would end Section 501(c)(3) federal tax-exempt status for private primary and secondary schools, colleges, universities, professional schools, and trade schools that adopt, maintain, or enforce a policy or practice discriminating on the basis of race, color, or national or ethnic origin -- a category the agencies said extends to programs "rebranded" as diversity, equity, or inclusion. The rule would reach admissions, scholarships and loans, athletics, and every other school-administered or school-supported program, and Treasury and the IRS estimated it could affect as many as 18,000 institutions. Treasury Secretary Scott Bessent said "rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature," and IRS Chief Executive Officer Frank J. Bisignano said schools that continue race-based practices "should expect to lose that status."

Treasury and the IRS grounded the proposal in Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard, framing it as clarifying an existing nondiscrimination condition on tax exemption rather than creating a new one. The proposal goes beyond what those rulings themselves required: SFFA addressed race-conscious selective college admissions specifically, while this rule extends the tax-exemption threat to K-12 admissions, scholarships, athletics, and other programs the decision never reached, and explicitly targets DEI-framed diversity initiatives rather than only formal racial exclusion. The rule would also eliminate existing IRS guidance that had permitted schools to use racial preferences in admissions, facilities, programs, and financial aid, while continuing to allow schools to use race-neutral criteria -- income, geography, first-generation status -- to assist disadvantaged students.

The proposed regulations would take effect for taxable years beginning on or after May 31, 2027, and would not restrict a private school's religious mission or its ability to select students based on genuine religious affiliation. The proposal follows other administration actions using federal funding and tax leverage against institutions over diversity policies, including the 2025 revocation of Harvard's tax-exempt status and international-student visa privileges.