The U.S. Department of the Treasury and the Internal Revenue Service have formally proposed revoking tax-exempt status from private educational institutions that use race-based policies in admissions, scholarships, or other programs, arguing that they constitute discrimination.

Some schools offer admission, scholarships or other assistance to historically disadvantaged groups and minorities who were locked out of educational opportunities in previous decades. 

But last year, the federal government told colleges to stop using race in admissions, scholarships, and other programs, or risk losing federal funding. The proposed rule goes further, threatening to pull private schools’ federal tax-exemption (501(c)(3)) status.

Feds to Virginia schools: End race-based policies or risk losing funds

The proposal aligns with broader efforts by President Donald Trump’s administration to eliminate race-based considerations in education. If found in violation, institutions’ financial stability and student support could be at risk.

It’s the latest development stemming from the Supreme Court’s June 2023 decision that effectively ended affirmative action in higher education by striking down race-conscious admissions policies at Harvard University and the University of North Carolina. 

Under the proposal, private institutions receiving the tax exemption would follow a ban on racial discrimination affecting an estimated 18,000 private educational institutions, from K–12 schools through colleges and trade schools. 

The rules would cover admissions, athletics, financial aid, scholarships, educational programs, and other school-supported activities. 

“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 in a Sept. 3 statement, adding that the proposed regulations put institutions on “notice” and schools that engage in racial discrimination should “expect to lose that status.”

Under the proposal, the changes would remove older IRS provisions that allow certain race-based preferences, which Treasury and the IRS say conflict with Supreme Court precedent.

The proposal states that religious schools could retain their religious missions and select students based on genuine religious affiliation, consistent with federal law.

Schools could also still support disadvantaged students using race-neutral factors such as income, geography, first-generation status, hardship, military-family status, or academic achievement.

The proposed rules would apply to tax years beginning on or after May 31, 2027, giving schools time to revise their policies.

Chris Peace, president of the Council of Independent Colleges in Virginia, said the 28 nonprofit private colleges represented in the group practice and promote discrimination-free educational environments. 

He added that Title VI of the Civil Rights Act of 1964 already prohibits intentional discrimination based on race, color, or national origin.

“All of our institutions took seriously the federal government’s requests and did sort of internal inventories on … all relevant programs or other student opportunities to ensure that … they were in compliance with the federal law and federal interpretations of law,” Peace said by phone.

“At the end of the day, we’re going to remain compliant with federal law and expectations,” he said.

The public comment period for these proposed regulations remains open until Nov. 3, with potential publication by late May 2027.

Comments can be submitted through the eRulemaking Portal at www.regulations.gov (indicate IRS and REG-119986-25). 

Comments may also be submitted by paper to: CC:PA:01:PR (REG-119986-25), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.