IRS Proposes to End Tax-Exempt Status for Schools With Biased Policies
The Internal Revenue Service has issued proposed regulations that would deny 501(c)(3) status to private schools with policies that discriminate based on race, color, or national origin, regardless of intent.
The IRS on September 4, 2026, proposed new regulations that would render any private school with a racially discriminatory policy ineligible for tax-exempt status under Section 501(c)(3). Critically, the proposed rules would apply to any policy that discriminates on the basis of race, color, or national or ethnic origin in effect, regardless of the school's intent. This represents a significant potential shift in IRS enforcement, moving from an intent-based standard to an effects-based one.
Law firms' clients in the education sector, from primary schools to universities, could face challenges to their tax-exempt status over facially neutral admissions, financial aid, or disciplinary policies if those policies are found to have a disparate impact. Counsel should consider reviewing existing policies for potential risks under this proposed new standard. The regulations are now open for a public comment period, and firms may wish to advise clients on submitting feedback before the rule is finalized. The final form of the regulations and any subsequent agency guidance will be a key development to monitor.