The Treasury Department and the Internal Revenue Service (IRS) have introduced proposed regulations that could strip tax-exempt status from private schools using race-based admissions or scholarships. This initiative targets roughly 18,000 institutions and could affect 750,000 scholarship recipients.
The 18,000 private schools facing tax-exempt revocation
Under the proposed rules, the Internal Revenue Service (IRS) would revoke the 501(c)(3) status of private elementary,secondary, and post-secondary institutions that maintain policies discriminating based on race, color, or national origin. According to the report, this designation is critical because it exempts organizations from federal income tax and allows donors to claim tax deductions on their contributions. The loss of this status would not only increase the tax burden on the schools themselves but would likely stifle the flow of charitable giving from wealthy benefactors.
The scale of the proposal is significant, with officials estimating that 750,000 students currently benefiting from scholarships tied to racial or ethnic identity could see those programs dismantled. If the public comment period ending November 3 does not derail the plan, the regulations would apply to school tax years starting after May 31, 2027.
Scott Bessent’s crackdown on 'diversity-enhancing' labels
Treasury Secretary Scott Bessent has positioned this move as a necessary defense of American students, arguing that labels like "equitable" or "inclusive" are merely rebranding for discriminatory practices. as reported, the new regulations would eliminate previous IRS provisions that allowed schools to favor minority groups in specific circumstances to remedy past exclusion. under the new framework, any race-based treatment is classified as discrimination regardless of the institution's stated goal of advancing campus diversity.
To provide a pathway for compliance, the Treasury Department specifies that schools may still utilize race-neutral criteria. These include academic achievement, family income, geographic location, military-family background, individual hardship, and first-generation college status. Additionally, religious institutions are permitted to continue selecting students based on genuine religious affiliation.
The $21.5 million Deloitte settlement and the anti-DEI campaign
This proposal is a central pillar of President Donald Trump's broader effort to dismantle diversity, equity, and inclusion (DEI) initiatives across the United States. Since returning to office in January 2025, President Trump has utilized executive orders to compel federal agencies to challenge race-based preferences in workplaces and schools. The Department of Education has already begun removing DEI materials and warning institutions that receive federal funding against using racial preferences in hiring or admissions.
The administration's strategy extends beyond education into the corporate sector. The report highlights a recent twenty-one-and-a-half-million-dollar settlement with the consulting firm Deloitte. That case resolved allegations that Deloitte used race- and sex-based employment practices while claiming compliance with federal contracting rules, though Deloitte denied any wrongdoing in the settlement.
Todd Wolfson’s warning on the interpretation of civil rights law
The proposal has met with sharp resistance from academic advocates. Todd Wolfson, President of the American Association of University Professors, argues that the IRS is failing to provide neutral enforcement of civil rights law. Wolfson contends that federal policy has historically distinguished between policies designed to preserve racial exclusion and those intended to dismantle it, a distinction the current proposal ignores.
Significant operational questions remain regarding how the Internal Revenue Service (IRS) will actually police these policies. the National Association of Independent Schools has noted that there is substantial uncertainty regarding how the rules will be interpreted and implemented in practice. It remains unclear whether the IRS will require proactive reporting of all scholarship criteria or if it will rely on audits and whistleblower complaints to identify race-based policies.
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