Treasury and the IRS Propose Stripping Tax-Exempt Status From Any Private School That Considers Race — as Many as 18,000 Institutions, From Elementary Schools to Universities — and the Top Ways and Means Democrat Calls It "Racist Weaponization of the IRS"
On September 3, 2026, the Treasury Department and the IRS issued a notice of proposed rulemaking titled "Racial Nondiscrimination in Private Schools." Under the proposal, a private school that "adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin" would not be treated as operated exclusively for exempt purposes and would lose its federal tax exemption under section 501(c)(3). The rule reaches admissions, educational policies, scholarships and loans, athletics, and every other school-administered program, and Treasury estimates it may affect as many as 18,000 private educational institutions — elementary schools, trade schools, professional schools, colleges and universities.
The rule rescinds prior IRS guidance the administration says permitted racial preferences, and permits race-neutral substitutes such as income-based or geographic criteria. Religious schools may still impose religious affiliation requirements. The proposal was scheduled for publication in the Federal Register on September 4, with comments due sixty days later, and would apply to taxable years beginning on or after May 31, 2027.
Because 501(c)(3) status also governs the deductibility of donations, the rule puts at risk the charitable deduction for gifts to affected schools — a point tax practitioners flagged immediately.
Treasury Secretary Scott Bessent framed the rule as civil rights enforcement. IRS chief Frank Bisignano said institutions that "promote discriminatory practices" would no longer receive the benefits of exemption. Rep. Richard Neal (D-MA), ranking member of the House Ways and Means Committee, called it a racist weaponization of the tax code, and the NAACP Legal Defense Fund promised litigation.
“Under President Trump, this Administration is standing up for America's students by ensuring racial discrimination has no place in American education.”