On September 4, 2026, the IRS and Treasury Department published proposed regulations (REG-119986-25) that would redefine the nondiscrimination standards every tax-exempt private school must meet under section 501(c)(3). If finalized, these rules could require meaningful changes to admissions policies, scholarship programs, endowments, and donor agreements at schools across the country.

The regulations would apply to private primary, secondary, preparatory, or high schools, as well as colleges and universities for taxable years beginning after May 31, 2027.

These are proposed regulations – not final – but the compliance window is tight, and private schools and their advisors should prepare now for increased scrutiny after the IRS issues final regulations.

Link to What the Proposed Regulations Would Do What the Proposed Regulations Would Do

The proposed regulations would make clear that a private school cannot 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 – regardless of the purpose, including diversity or remedial objections. The rule applies to educational policy, admissions, scholarships and loans, athletics, and all other school-administered or school-supported programs.

Significantly, the proposal would modify Rev. Proc. 75-50 by deleting language that currently permits preferences favoring racial minority groups in admissions, financial aid, and programs when intended to promote nondiscrimination. All other provisions of Rev. Proc. 75-50 (as modified by Rev. Proc. 2019-22), including existing recordkeeping and policy-publication requirements, would remain in effect.

Link to Religious Schools: What Isn’t Affected Religious Schools: What Isn’t Affected

Schools may continue to select students based on religious affiliation or membership, even where the religious community shares common ancestry or ethnic traits – so long as the criterion is genuinely religious, not a proxy for race or ethnicity. Anti-prejudice and anti-discrimination initiatives also remain permissible if implemented through race-neutral means.

Link to Key Compliance Steps for Private Schools Key Compliance Steps for Private Schools

If finalized as proposed, these regulations would apply to taxable years beginning after May 31, 2027. Schools should begin compliance review now:

  • Conduct a comprehensive inventory of admissions criteria, scholarship and loan terms, donor restrictions on use of scholarship funds, athletics policies, and vendor-administered programs.
  • Review gift instruments and restricted endowments for race-conscious eligibility criteria. Where necessary, engage donors or heirs and obtain legal review to revise terms.
  • Evaluate whether current financial-aid criteria can transition to race-neutral alternatives such as income, geography, or first-generation status, as Treasury suggests.
  • Confirm ongoing compliance with Rev. Proc. 75-50 recordkeeping and nondiscrimination-policy publication obligations.

Link to Comment Period and Deadlines Comment Period and Deadlines

Comments and requests for a public hearing are due 60 days after Federal Register publication or November 3, 2026. Comments may be submitted through Regulations.gov. Note that all comments are public and cannot be edited or withdrawn once submitted electronically.

Link to The Bottom Line The Bottom Line

These proposed regulations signal a significant shift in IRS enforcement posture for tax-exempt private schools. While they are not yet final, the practical compliance burden – particularly around restricted endowments and scholarship programs – warrants immediate attention. CFOs, CPAs, and school leaders should assemble their teams now, inventory affected policies and donor agreements and consider submitting comments before the November 3 deadline. If you have questions about how these proposed rules could affect your school, please contact me at ayoung@foxrothschild.com or (610) 458-1416.