IRS Proposes Revoking Tax-Exempt Status for Schools Using Race-Based Criteria

Key points

• The IRS and Treasury Department issued proposed regulations targeting private educational institutions that maintain race-based preferences in admissions, financial aid, or other programs.
• The proposal could affect up to 18,000 private schools, universities, and trade schools, potentially impacting approximately 750,000 students who currently benefit from race-based scholarships.
• Under the new rules, institutions would lose their Section 501(c)(3) tax-exempt status if they discriminate based on race, color, or national or ethnic origin, eliminating previous IRS guidance that allowed such preferences.
• The administration argues that rebranding race-based preferences as 'diversity-enhancing' does not change their discriminatory nature, citing Supreme Court cases including Students for Fair Admissions v. Harvard.
• Religious schools are exempt from this restriction and may continue to select students based on genuine religious affiliation or membership.
• The proposal includes a 60-day public comment period, with finalized rules expected to apply to taxable years beginning after May 31, 2027.

Background

This development follows the 2023 Supreme Court decision that ended race-based affirmative action in college admissions, which the current administration has used to justify broader crackdowns on diversity, equity, and inclusion policies. It also continues a pattern of the administration using tax enforcement as a lever against institutions it views as non-compliant, similar to recent moves regarding tax credits for immigrants and stricter event standards at universities. The proposal is part of a broader effort to enforce a 'merit-based' opportunity framework across the education sector.

How outlets are covering it

The Trump administration, through Treasury Secretary Scott Bessent and IRS CEO Frank Bisignano, frames the proposal as a necessary step to eliminate racial discrimination and ensure 'fairness' in American education, arguing that race-based preferences are inherently discriminatory. Conversely, Democratic leaders, including Senators Ron Wyden and Raphael Warnock, and Representative Richard Neal, characterize the move as a political weaponization of the IRS to punish institutions for supporting minority students and rolling back civil rights progress. They argue that the IRS is being used to target left-leaning organizations based on political disapproval rather than objective legal standards. Bloomberg Tax notes the regulatory focus on defining the boundaries of race-based programs under Section 501, while Accounting Today highlights the potential impact on donor deductions and the broader conflict with universities like Harvard.

Why it matters

The potential loss of tax-exempt status would have severe financial consequences for thousands of educational institutions, as it would eliminate the tax deductibility of donor contributions and potentially trigger significant tax liabilities. This could force many schools to close, restructure, or drastically alter their admissions and financial aid policies. The move also sets a precedent for using tax enforcement to regulate social policies, potentially affecting other nonprofit sectors beyond education. For students, it could reduce access to scholarships and support systems that have historically helped minority groups, while for donors, it could make charitable giving to these institutions less attractive.

What to watch

The IRS will accept public comments on the proposed regulations for 60 days. Following this period, the agency is expected to finalize the rules, which would take effect for taxable years beginning after May 31, 2027. Institutions may face legal challenges or seek to adjust their policies to comply with the new nondiscrimination standards. The outcome of the public comment period and any subsequent litigation will determine the final scope and impact of the regulations.