Treasury, IRS Target Tax-Exempt Status for Private Schools Over Race-Based DEI Policies

On September 3, 2026, the U.S. Department of the Treasury and Internal Revenue Service issued proposed regulations that would deny or revoke 501(c)(3) tax-exempt status for private educational institutions maintaining policies or practices that discriminate on the basis of race, color, or national or ethnic origin. The rule explicitly targets programs in admissions, scholarships, loans, athletics, and other school-administered activities, including those rebranded under diversity, equity, and inclusion (DEI) frameworks. It would apply to as many as 18,000 private primary, secondary, and postsecondary institutions, with an estimated impact on 750,000 students receiving race-tied aid. The regulations are slated to take effect for tax years beginning after May 31, 2027, following a public comment period.

Treasury Secretary Scott Bessent stated that “Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature,” framing the move as enforcement of fundamental public policy against racial discrimination, building on precedents like Bob Jones University v. United States and the 2023 Students for Fair Admissions v. Harvard decision. IRS Chief Executive Officer Frank J. Bisignano added that institutions engaging in such practices “should expect to lose that status.” Religious schools retain latitude for faith-based missions and student selection consistent with federal law, and race-neutral criteria (e.g., income or first-generation status) remain permissible.

This proposal extends the Trump administration’s broader campaign against DEI, which began with executive actions on Inauguration Day 2025 and included prior threats against institutions like Harvard. Education advocacy groups, including the American Council on Education and American Association of University Professors, have signaled opposition and potential legal challenges, arguing the rules could chill targeted support for underrepresented students and affect fundraising, bond issuance, and operations. Critics contend the policy may conflict with interpretations of civil rights statutes and Supreme Court precedent, while supporters view it as a necessary correction to restore merit-based access.

Deeper connections emerge in the intersection of tax policy, institutional autonomy, and evolving civil rights enforcement: by leveraging 501(c)(3) requirements tied to “public policy,” the administration creates a financial lever that could accelerate the dismantling of race-conscious programs across K-12 and higher education, potentially reshaping donor incentives and prompting schools to adopt race-neutral alternatives or face compliance costs. This also raises free speech and association questions for private entities, as the rules test the boundaries between nondiscrimination mandates and institutional mission, echoing historical battles over tax-exempt status while amplifying debates in conservative policy circles about federal overreach versus equality under law.