IRS Proposes Tying School Tax Exemption to Race-Neutral Policies
The Treasury and IRS have proposed new rules that would revoke the 501(c)(3) tax-exempt status of independent schools that use race-conscious criteria in admissions, financial aid, or other programs.
The U.S. Treasury and IRS have issued proposed regulations that would deny Section 501(c)(3) tax-exempt status to independent K-12 schools using policies that discriminate based on race, color, or national origin. The proposal directly applies the principles from the Supreme Court's 2023 'Students for Fair Admissions v. Harvard' decision to the tax-exempt status of private institutions, which are not otherwise broadly subject to that ruling.
This development poses a fundamental threat to the operating and financial models of many independent schools. It mandates a comprehensive review of admissions criteria, financial aid awards, scholarship terms, and diversity, equity, and inclusion (DEI) initiatives to ensure they are race-neutral. Even programs intended to promote diversity could jeopardize a school's tax exemption if they rely on race-based criteria. The proposed rule would supersede prior IRS guidance that had permitted limited use of race-conscious policies to promote nondiscrimination.
The regulations are currently proposed and subject to public comment, with a potential effective date of May 31, 2027. Affected institutions should begin auditing all student-facing programs for race-conscious criteria and explore legally defensible, race-neutral alternatives to achieve diversity objectives, such as focusing on socioeconomic status, geography, or first-generation status.