Private Schools and Tax-Exempt Status: Understanding the IRS’s Proposed Changes to Racial Nondiscrimination Requirements

Private schools have long operated under federal tax-exemption requirements that prohibit racial discrimination. On September 3, 2026, the IRS and Treasury Department released proposed regulations that would change how those longstanding requirements apply to schools recognized as tax-exempt under Section 501(c)(3). The proposal would affect private elementary schools, secondary schools, colleges, universities and other educational institutions classified as private schools for federal tax purposes.

At the same time, educational institutions continue to navigate a broader evolution in federal diversity, equity and inclusion (DEI) policies that began in 2025 through executive orders, federal agency guidance and enforcement initiatives involving educational institutions and federally funded programs.

Although the proposed IRS regulations are not yet final, private schools may benefit from understanding how the proposal could affect admissions practices, scholarship programs, governance processes and long-term compliance planning. Comments on these proposed regulations are due to the IRS by November 3, 2026. If finalized, the regulations would apply to taxable years beginning on or after May 31, 2027.

Existing Requirements for Private Schools

The requirement that private schools maintain a racially nondiscriminatory policy as to students is not new. According to the proposed regulations, private schools have been subject to nondiscrimination requirements since the early 1970s through administrative guidance and court decisions, including the Supreme Court’s decision in Bob Jones University v. United States. Schools currently certify compliance through existing IRS reporting requirements.

The proposal does not create the underlying nondiscrimination requirement. Instead, it proposes a different, potentially more restrictive standard for determining whether a private school continues to qualify for federal tax exemption.

Federal DEI Developments and Private School Compliance

Beginning in 2025, federal actions addressed DEI-related programs across various sectors, including education. Executive orders, agency guidance and enforcement initiatives prompted many educational organizations to reexamine policies involving admissions, scholarships, hiring, training and student programming.

While many of those developments focused on institutions receiving federal funding, the proposed IRS regulations are noteworthy because they address private schools through federal tax-exemption rules rather than through federal funding requirements. Under the proposed regulations, tax-exempt status could become the mechanism for evaluating compliance.

For private schools that historically viewed federal funding requirements and tax-exempt requirements as separate considerations, the proposal highlights the importance of monitoring both areas.

How the Proposed IRS Regulations Could Affect Private Schools

The proposed regulations would provide that a private school is not operating exclusively for exempt purposes if it adopts, maintains or enforces policies or practices that discriminate based on race, color or national or ethnic origin in educational policies, admissions policies, scholarship and loan programs, athletic programs or other school-administered or school-supported programs.

The proposal would also eliminate certain language that has historically appeared in IRS guidance and that addressed circumstances involving programs intended to ameliorate past discrimination or promote nondiscriminatory policies. Under the proposal, that accommodation would no longer be available.

Private School Policies and Programs to Review

Because many admissions cycles, scholarship commitments, donor arrangements and strategic initiatives are planned well in advance, private schools may wish to begin reviewing existing programs and documentation now rather than waiting for any final regulations. Areas often considered during such reviews include:

What Remains Permissible Under the Proposed Regulations

The proposed regulations would not eliminate all programs designed to support students. Treasury’s proposal indicates that organizations may continue pursuing charitable purposes that include combating prejudice and discrimination, provided they do so through means that comply with the proposed rules.

The proposal also states that need-based financial assistance and religious selection criteria remain permissible, provided they are administered in accordance with the standards described in the proposed regulations. Examples specifically referenced include financial need, family income, geographic considerations, first-generation status, individual hardship, military-family status and academic achievement. Religious affiliation may also remain a permissible criterion under the circumstances described in the proposal.

How Private Schools Can Prepare for Potential Changes

The IRS proposal represents an important development for private schools because it would affect tax-exempt qualification standards rather than focusing solely on federal funding programs. While the regulations remain proposed and could change before becoming final, schools may benefit from understanding how the proposed rules could affect admissions, financial aid, student programs, scholarships, athletics and governance practices.

As federal DEI-related requirements and guidance continue to evolve, private schools should stay informed about regulatory developments and evaluate whether existing policies, procedures and documentation still align with applicable federal requirements.

Withum’s Not-for-Profit and Education Services Team is available to help organizations navigate questions about this proposed regulation and adapt effectively before it is adopted.