Roughly 18,000 private schools could lose their federal tax exemption under proposed regulations Treasury and the IRS issued September 3, which would revoke 501(c)(3) status from schools with policies that discriminate based on race, color or national origin. The rule, if finalized, would apply to taxable years beginning on or after May 31, 2027, and covers admissions, scholarships, athletics and every other school-administered program, though it remains a proposal, not a final rule, and has not taken effect.
What a changed exemption doesn’t undo: Neither the rule nor an IRS notice says how to fix a return that already claimed a deduction tied to a school’s status, and The IRS Refund Recovery Kit lays out the 3-year deadline for most refund claims. Check the window for fixing a prior return →
What the proposed rule would actually do
The IRS newsroom release says the regulation would disqualify private educational institutions from 501(c)(3) status if they adopt policies discriminating on the basis of race, color or national or ethnic origin, whether in admissions, scholarships, loans, athletics or any other program the school administers. The Treasury Department’s announcement quotes Secretary Scott Bessent saying “schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature.” IRS Chief Executive Officer Frank J. Bisignano added that institutions “that promote discriminatory practices will no longer be afforded the benefits of federal tax-exempt status.” The rule preserves religious schools’ ability to select students based on genuine religious affiliation and permits race-neutral admissions criteria such as family income, geographic location, first-generation status and academic achievement. Treasury grounds its legal authority for the change in three Supreme Court cases: Brown v. Board of Education, Bob Jones University v. United States, and Students for Fair Admissions v. Harvard, framing the proposal as an update to decades-old IRS provisions that Treasury says still permit race-conscious practices the courts have since rejected in other contexts.
Why it is a proposal, not a done deal
The regulation was published in the Federal Register on September 4 under docket REG-119986-25, and the public comment period runs through November 3, 2026. Treasury has scheduled a public hearing by teleconference for December 2, and the hearing will only go forward if at least one speaker submits an outline of remarks by the November 3 deadline, the same date the comment window closes; requests to attend without speaking are due November 30, and accessibility accommodations must be requested by November 27. Nothing in the rule takes effect before taxable years beginning on or after May 31, 2027, and the comment and hearing process, spanning nearly three months from publication to the scheduled hearing, could still change its final terms before then.
The number behind “18,000 schools”
Treasury’s own release describes the rule as one that “may affect as many as 18,000 private educational institutions,” a figure covering primary and secondary schools as well as colleges, universities, professional schools and trade schools nationwide that currently hold 501(c)(3) status. The release does not say how many of those 18,000 schools currently maintain the kind of race-based policies the rule targets, only that the total universe of potentially affected institutions runs that high, meaning the number of schools that would actually lose exemption once the rule takes effect could be far smaller.
The real money question: a donor’s own deduction
The consequence with the most direct financial effect on an individual is not the school’s, but a donor’s. Charitable deductions under the tax code depend on a gift going to an organization that qualifies under Section 501(c)(3); if a school loses that status, a later gift to it stops qualifying for the federal deduction, the same mechanic that already governs every other charity. That is a real dollar consequence for the roughly 18,000 schools’ worth of alumni, parents and grandparents who itemize deductions and give to a religious or private school every year. Donors who want to confirm a school’s current standing, rather than assume nothing has changed once the rule takes effect, can check the IRS’s own Tax Exempt Organization Search, which lists automatic revocations of exemption alongside determination letters, required Form 990 filings and the underlying Pub 78 data the IRS uses to confirm an organization’s eligibility to receive deductible gifts in the first place. The tool itself carries a caution worth noting for anyone relying on it closely: the IRS says it is still processing a backlog of paper-filed Form 990 returns from 2021 onward, so a school’s listed status may lag its actual filing history by some months.
What isn’t resolved yet
Neither the proposed rule nor the IRS newsroom release addresses what happens to a deduction a donor already claimed for a gift made before any exemption change takes effect, and the rule’s own effective date, more than a year and a half away, leaves an unusually long runway before that question has to be answered for any specific school. For now, the 18,000-school estimate, the May 2027 effective date, and the November 3 comment deadline are the only firm numbers in what remains an open rulemaking that could still be revised before it is finalized.
What a donor does while the rule is still proposed
Nothing in the proposed rule tells a taxpayer who already claimed a deduction for a gift to an affected school what happens to that return if the school’s exemption changes after the May 2027 effective date, and the same kind of uncertainty applies whenever a refund or an amended return gets tangled up in a separate IRS matter.
The IRS Refund Recovery Kit explains the refund-trace steps for filing Form 3911 and lays out the 3-year deadline the IRS applies to most refund claims.
See what starts a refund trace on a stuck return →
This article was produced with AI assistance and checked against the primary sources linked above.
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
