Treasury and IRS move to strip 18,000 private schools of tax-exempt status over race-based policies

The Trump administration dropped its most expansive tax weapon yet in the long war over diversity programs in American education. On Thursday, the Treasury Department and the Internal Revenue Service jointly issued proposed regulations that would revoke federal tax-exempt status from any private school found to use race in admissions, scholarships, financial aid, athletics, or other programs. Treasury Secretary Scott Bessent put the number of institutions potentially in scope at up to 18,000 - covering colleges, universities, professional schools, trade schools, and K-12 private academies across the country.

The IRS announced the regulations on September 3, 2026, framing the move as fulfillment of President Trump's executive orders ending discrimination and restoring merit-based opportunity. The Treasury Department proposed the change in a new regulation that, if made final, would kick in after May 2027. No lawsuits have been filed yet, but legal challenges are widely anticipated.

What the rule actually does

Under the proposed rule, a private educational institution would not qualify for tax-exempt status if it adopts, maintains, or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin. The prohibition would extend beyond admissions to educational policies, scholarships and loans, athletics, and other school-administered or school-supported programs.

Scores of universities have already shut down or rebranded their DEI offices and ended scholarships and clubs designed for minority students under pressure from the White House. Thursday's rule takes direct aim at that strategy. In announcing the proposal, Bessent suggested that even policies no longer operating under the DEI banner could be targeted. "Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature," he said.

The proposal does not affect schools that select students based on religion. Replacement programs would need to rely on race-neutral criteria such as "family income, geographic location, first-generation status, individual hardship, military family status, or academic achievement."

IRS CEO Frank Bisignano, who runs the agency under a restructuring that gave the position a corporate title, put it bluntly. "Private educational institutions that promote discriminatory practices will no longer be afforded the benefits of federal tax-exempt status," he said. "Today's proposed regulations put institutions on notice and schools that continue to engage in racial discrimination should expect to lose that status."

The financial knock-on effects

Losing 501(c)(3) status does not merely end a school's federal tax break. The consequences run deeper into capital markets. Stripping schools of their 501(c)(3) status would terminate their ability to issue tax-exempt municipal bonds, driving up borrowing costs and hitting a significant corner of the muni market. It would also potentially drive down donations, as donors would no longer benefit from the tax deduction, which could mean lower endowments and eroded credit quality.

Marjorie Hass, president of the Council of Independent Colleges, said the practical damage would show up first in donor behavior. Hass said the change would most likely impact donations, which are often earmarked for scholarships. The benefit saves many universities millions of dollars every year.

Once the rules are finalized, enforcement is likely to involve IRS audits of schools and universities to determine whether they were impermissibly considering race. Such audits could go on for months and give a university the opportunity to challenge any revocation of tax-exempt status in court, where a judge could strike down the Treasury's regulations.

Ellen Aprill, an expert in nonprofit taxes at UCLA, was direct about the chilling effect regardless of the legal outcome. "If a new administration is ever in position, I would think they would revoke these regs, but in the meantime a lot of damage can be done because people are running scared," she told The New York Times.

The Bob Jones precedent - and its limits

The administration's legal anchor is a 1983 Supreme Court case. The tax regulation the administration cited is Bob Jones University v. United States. The 1983 case ruled that the IRS could revoke tax-exempt status from Bob Jones University because the school had a policy banning interracial relationships. Bob Jones, a small Christian school in South Carolina, lost the benefit in the 1970s over the ban on interracial dating and marriage. The Supreme Court upheld the IRS's decision. The school has since ended the ban and regained tax-exempt status in 2017.

But the legal terrain here is contested. The administration is essentially arguing the same "fundamental public policy" doctrine now cuts against race-conscious minority programs, not for them. Critics say that reading inverts the precedent's logic and will not survive judicial review. Trump threatened to cut the benefit for Harvard University last year during his battle with the nation's oldest college. Harvard officials said there was no legal basis for doing so and argued it would force cuts to financial aid and crucial medical research.

Todd Wolfson, president of the American Association of University Professors, did not mince words. "Weaponizing the IRS to attack colleges and universities that uphold and expand civil rights is outrageous," Wolfson said. "This is blatantly racist political coercion intended to deny minority students reparative opportunities to further their education."

A broader pattern of higher-education pressure

The proposed rule is the latest in a series of actions by the Trump administration targeting race-based preferences and DEI practices. Since January 2025, the administration has used executive orders, non-binding agency guidance, grant terminations, subpoenas, and other enforcement mechanisms to challenge practices it considers discriminatory. In June 2026, the Department of Justice announced investigations into 15 medical schools after stating that investigations of two other institutions had found they illegally used race in admissions.

Schools like Harvard University, Cornell University, and the Massachusetts Institute of Technology have been in the crosshairs of the administration and congressional Republicans over claims they allow antisemitism on their campuses while also taking issue with certain diversity programs.

Meanwhile, Capitol Hill goes quiet

The Treasury rule landed the same week the Republican-led House effectively closed up shop for the fall campaign season. With government funding in the rear view, the House on Thursday canceled votes for the last two weeks of September, leaving just four days of legislative business before the November 3 midterm elections - a reversal from Speaker Mike Johnson's comments on the matter earlier this week.

With midterm elections looming and members of Congress eager to campaign, the Republican-led House was scheduled to work for three more weeks before November. On Thursday, Speaker Mike Johnson of Louisiana cut that back to one, canceling planned votes in the final two weeks of September. Just days before the announcement, Johnson had publicly pushed back against the idea. "Republicans are here to work," Johnson told reporters on Tuesday when pressed if GOP Rep. Thomas Massie's prediction of a schedule change might come to fruition.

The House, which returned briefly this week after a months-long recess, had already been facing attendance issues and a shortage of must-pass legislation. The two extra weeks will give candidates in competitive races more time to sell themselves to voters. And it means little, if any, legislation is likely to pass Congress before the midterms.

Lawmakers will return again for a lame duck session on November 9, scheduling five more weeks of legislative business before the end of the 119th Congress. That lame duck, not the campaign stretch, is now the realistic window for any legislation - including the December spending deadline already looming from last week's stopgap deal.

The thin calendar means Congress will not hold hearings or votes on the Treasury DEI rule before November. That leaves the administration free to finalize the regulation largely outside congressional oversight until a new Congress is seated.

What to Watch

• Public comment period: The proposed regulations open a formal comment window. Education groups and civil rights organizations have already signaled they will file detailed objections. Watch for the comment deadline, which Treasury has not yet announced, and the volume of institutional responses - a large record typically helps challengers in court.
• Federal litigation: Expect an emergency motion for a preliminary injunction in federal district court, likely from a coalition of universities or civil rights groups, before the May 2027 effective date. The same Maryland federal court that recently blocked the administration's birthright citizenship executive order is one venue to watch.
• IRS audit mechanics: The IRS has not yet released guidance on how auditors will determine what counts as a "racially discriminatory" policy. That operational detail matters enormously for schools trying to gauge their exposure.
• Muni bond market: Bond rating agencies have not yet issued formal guidance on whether to treat the proposal as a material credit risk for university bonds. A rating action on any major university would accelerate the financial pressure on the sector.
• Lame duck legislative response: With House votes canceled through mid-September and the chamber departing again September 17, any congressional pushback - either to codify or block the rule - will have to wait until after November 3.

Sources: IRS IR-2026-103 (September 3, 2026); NPR/Associated Press (September 4, 2026); UPI (September 3, 2026); CNBC (September 3, 2026); Bond Buyer (September 3, 2026); GV Wire/The New York Times (September 3, 2026); ABC News (September 3, 2026); The Spokesman-Review (September 3, 2026); Feldesman Tucker Leifer Fidell LLP analysis (September 3, 2026)