New IRS Nondiscrimination Rules: What Private Schools Should Review

Proposed regulations issued September 2026 could put the tax-exempt status of private schools, colleges, and universities at risk over race-conscious policies — well beyond admissions.

The U.S. Department of the Treasury and IRS recently issued proposed regulations to establish a new regulatory framework addressing racial nondiscrimination for private schools described in IRC §501(c)(3). Comments are due November 3, 2026, and a public hearing is scheduled for December 2, 2026. If finalized, the regulations would apply to tax years beginning after May 31, 2027.

While much of the public discussion around race-conscious practices has focused on admissions policies following the U.S. Supreme Court’s 2023 decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 600 U.S. 181 (2023), which arose in the context of college and university admissions, the proposed regulations reach beyond admissions and expressly affect scholarships, financial aid programs, athletics, and other school-administered or school-supported activities.

What do the proposed IRS regulations provide?

The proposal would add new Treas. Reg. §1.501(c)(3)-2. Under the proposed rule, a private school wouldn’t be considered operated exclusively for exempt purposes if it adopts, maintains, or enforces a policy or practice that discriminates on the basis of race, color, or national or ethnic origin in educational policies, admissions, scholarships, loans, athletics, or other school-administered or school-supported programs.

Crossing this line would be grounds for denial or revocation of exempt status, as the proposal offers no de minimis exception.

The consequences are significant: The school’s net income would become subject to federal income tax, contributions would no longer be tax-deductible, and tax-exempt financing could be affected.

Proposed regulations aren’t yet effective. Comments are due November 3, 2026, and a public hearing is scheduled for December 2, 2026. If finalized, the rules would first apply to tax years beginning after May 31, 2027.

The preamble to the proposed regulations states the rule would apply regardless of intent, meaning race-based actions intended to remedy past discrimination or promote diversity would be treated the same as other race-based distinctions.

Treasury and the IRS characterize the proposal as an update to existing regulations and guidance intended to provide greater clarity and a consistent standard for applying the nondiscrimination requirements that govern private schools’ exempt status.

Which private schools would be affected?

The proposal applies to private schools as defined under IRC §170(b)(1)(A)(ii), including:

• Private K-12 schools
• Colleges and universities
• Professional schools
• Trade and vocational schools

Government-operated educational institutions are excluded from the proposal. Public colleges, universities, and K-12 schools therefore would not be subject to these rules in their capacity as governmental entities.

Treasury and the IRS estimate the proposed regulations may affect the 18,000 tax-exempt private elementary, secondary, and post-secondary schools in the United States, along with 750,000 students who may qualify for scholarships allocated on the basis of race, ethnicity, or national identity.

How the proposal would change existing IRS guidance

One of the most consequential aspects of the proposal involves modifications to Rev. Proc. 75-50.

The proposed regulations would remove longstanding provisions treating certain minority-favoring admissions or scholarship programs as consistent with a school’s nondiscriminatory policy when designed to advance that policy.

Treasury characterizes these revisions as eliminating safe-harbor language that could otherwise be interpreted as permitting race-conscious aid or program preferences.

Importantly, the remainder of Rev. Proc. 75-50 would remain in effect. Existing requirements relating to publication of nondiscrimination policies, recordkeeping, and annual compliance obligations would continue.

Which race-neutral practices could schools continue?

The proposal acknowledges several important distinctions.

According to the preamble, schools may continue to make decisions based on religion where the criteria are genuinely religious rather than proxies for race or ethnicity. Treasury also recognizes that schools may continue to use race-neutral criteria such as:

• Family income
• Socioeconomic status
• Geographic location
• First-generation student status

The preamble further indicates anti-discrimination and anti-prejudice initiatives may continue if implemented using race-neutral approaches.

Why scholarships and financial aid may receive increased attention

Many colleges and universities have already modified admissions programs following the Students for Fair Admissions decision.

The proposed regulations may have a broader practical impact on scholarships and financial aid. Treasury’s discussion suggests race-restricted scholarships, identity-based financial aid programs, pipeline programs, and affinity initiatives could receive increased scrutiny under the proposed standard.

Institutions that already reviewed admissions practices after 2023 may still need to evaluate scholarships, donor-restricted funds, and related educational programs separately.

What should schools be doing now?

Although the regulations are only proposed and may change before being finalized, schools may wish to begin assessing potential areas of exposure.

Potential action items include:

• Reviewing admissions, scholarship, loan, athletics, and pipeline programs for race-conscious eligibility criteria
• Evaluating donor agreements, gift instruments, and endowment restrictions tied to race or ethnicity
• Reviewing programs administered through affiliated organizations or third-party vendors
• Confirming ongoing compliance with Rev. Proc. 75-50 publication and recordkeeping requirements
• Monitoring the rulemaking process and considering whether to submit comments before November 3, 2026, which is also the deadline to request to speak at the December 2 public hearing

How could the proposal affect other exempt organizations?

Although the proposal is limited to private schools, its reasoning could reach further. Many commentators are watching closely because Treasury grounds the regulations in broader tax-exemption principles, including the concept that charitable organizations must operate consistently with established public policy.

Treasury also notes the proposal is intended to provide a uniform standard for applying those principles in the educational context. Whether similar concepts could eventually be applied in other exempt-organization settings remains uncertain.

For now, schools, colleges, universities, and organizations funding educational programs should closely monitor developments as the rulemaking process unfolds.

How CLA can help with private school policy reviews

CLA’s national exempt tax professionals are monitoring these proposed regulations and related developments affecting exempt educational institutions.

We can help organizations evaluate scholarship programs, review governing documents and donor restrictions, assess compliance considerations, and monitor public comments and other developments during the regulatory process.

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