The Internal Revenue Service (IRS) has proposed a significant new rule that would revoke the tax-exempt status of private schools at all educational levels if they employ racial preference policies, including those associated with diversity, equity, and inclusion (DEI) initiatives. The Treasury Department estimates that this rule could affect approximately 18,000 private institutions across the United States, covering elementary, secondary, and post-secondary schools, including colleges and trade schools.
The proposal comes amid an intensifying national debate over the role of race-conscious policies in education. If enacted, the rule would have substantial financial implications for private schools that do not comply with the new standards.
IRS Cites Public Policy and Discrimination Ban
According to the IRS, maintaining tax-exempt status requires adherence to fundamental public policy, which includes a strict prohibition against racial discrimination. The proposed regulations would extend beyond admissions and hiring practices. They would also apply to educational policies, scholarships, athletics, and any school-administered program that uses race-based criteria.
Treasury Secretary Scott Bessent stated that the rule is aimed at schools that have "rebranded" their DEI offices or policies without making substantive changes to their underlying practices. He emphasized that simply changing the language or titles of programs does not alter their potentially discriminatory nature.
"Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature. Today’s Treasury and IRS proposed regulations establish a clear standard, and the institutions that continue to use discriminatory practices will no longer receive the benefits of federal tax-exempt status."
— Scott Bessent, Treasury Secretary
The IRS clarified that the rule would also cover practices such as the formation of "affinity groups"—student organizations that limit participation based on demographic criteria—if the school provides institutional support. Medical schools that use "racial concordance" in admissions or patient assignments would also be subject to the new regulations.
Supreme Court Ruling and Recent Enforcement Actions
This proposed rule follows the Supreme Court’s decision in Students for Fair Admissions v. Harvard, which found that race-based admissions policies are unconstitutional. In response to the ruling, some universities, including Harvard, have changed the names of their DEI offices and indicated that they may continue to consider race in admissions through other means.
The Justice Department recently concluded an investigation into Yale Medical School, determining that the institution discriminated based on race in its admissions process. The investigation found that Black and Hispanic applicants had a higher chance of admission than similarly qualified White or Asian applicants. Assistant Attorney General Harmeet K. Dhillon commented, "Yale has continued its race-based admissions program despite the Supreme Court and the public’s clear mandate for reform."
Scope of the Proposed Rule
Under the proposed IRS rule, schools would be prohibited from using race-based criteria in any aspect of their operations if they wish to retain their tax-exempt status. This includes not only admissions and hiring but also extends to scholarships, athletics, and any other school-administered programs. The rule specifically targets practices that may have been rebranded or renamed but still rely on race as a factor.
The IRS noted that the rule would also apply to institutional support for affinity groups or organizations that restrict membership based on race or ethnicity. Medical schools that use race as a factor in admissions or in assigning students to patients would also be affected.
Alternatives and Race-Neutral Criteria
The proposed regulations do allow for the use of "race-neutral" criteria in admissions and financial aid decisions. Acceptable alternatives include family income, geographic location, first-generation college status, individual hardship, military family status, or academic achievement. These criteria have been adopted in some states as substitutes for race-based affirmative action policies.
Implementation Timeline and Public Response
If finalized, the rule is scheduled to take effect on May 31, 2027. The IRS and Treasury Department have not yet detailed how enforcement will be carried out or addressed the concerns raised by schools and advocacy groups. As of now, supporters of DEI initiatives have not issued a formal response to the proposed regulations.
The IRS is currently accepting public comments on the rule before it is finalized. The outcome of this process could have a far-reaching impact, potentially reshaping how private schools across the country structure their admissions processes, scholarship programs, and student organizations.
The debate over the proposed rule reflects broader national discussions about the role of race in education and the extent to which private institutions should be able to implement policies aimed at increasing diversity and inclusion. As the IRS moves forward with its proposal, private schools and advocacy groups are closely watching the developments and preparing for possible changes to federal tax policy.
