New Irs Proposal Threatens Universities' Tax-exempt Status Over Diversity Programs

The Trump administration unveiled a plan Thursday to cancel the tax-exempt status of universities that it says give preferential treatment to minority students.

The proposed regulations released by the IRS are aimed at preventing discrimination on the basis of race and could affect up to 18,000 high schools, universities and trade schools, the agency said. Around 750,000 students who qualify for scholarships tied to race, ethnicity or national identity could be affected, the department estimates.

The proposed rules would apply to the schools' admission decisions, how they dole out scholarships and loans, how their programs are run, and other policies. They could also hurt schools’ fundraising because their tax exemptions allow donors to deduct their gifts from their tax bills.

The proposal comes amid the administration’s long-running battle with a number of prominent universities, including its repeated threats to pull Harvard University's tax exemption. It is part of a broader initiative by the administration to scrutinize the nonprofit sector, including whether individual groups deserve their exemption from taxes.

It also comes in the wake of the Supreme Court's 2023 Students for Fair Admissions v. Harvard decision ending race-based affirmative action, which the administration has cited in cracking down on diversity, equity and inclusion policies in higher education. This has included trying to expand the scope of the high court's ruling to scrap race-neutral admissions practices, like socioeconomic factors, and grant programs supporting campuses with large populations of Hispanic and Asian students.

“Schools rebranding race-based preferences as equitable, inclusive, or diversity-enhancing does not change their discriminatory nature,” Treasury Secretary Scott Bessent said in a statement.

The proposed rules will establish a “clear standard, and the institutions that continue to use discriminatory practices will no longer receive the benefits of federal tax-exempt status.”

The American Association of University Professors, which has battled the administration in court over a number of its decisions, ripped the proposal. AAUP faculty chapters, including those at Columbia, Harvard and UCLA, have been key to challenging the Trump administration's efforts to force colleges into deals that align with the president's higher education policies.

“Weaponizing the IRS to attack colleges and universities that uphold and expand civil rights is outrageous,” Todd Wolfson, the group’s president, said in a statement. “This is blatantly racist political coercion intended to deny minority students reparative opportunities to further their education.”

Mike Gavin, head of the Alliance for Higher Education, said the "administration’s latest rules changes are its most blatant attack to keep working class Americans and people of color from accessing higher education and a better life."

"The new rules by the Treasury Department are the latest twist of the administration’s economic vise to force colleges and universities to comply with its highly partisan political agenda," he said in a statement.

The proposed regulations do not detail what the administration would view as discriminatory.

In cases where donors have established scholarships tied to race, the schools “may need to work” with donors or their heirs to develop “an alternative set of criteria,” the administration said. Among its acceptable alternatives are geographic-based and income-based criteria as well as a student’s status as a first-generation student.

Religious schools would continue to be allowed to choose students “based on genuine religious affiliation or membership," the administration said.

“Use of a religiously based selection criterion does not become discrimination on the basis of race, color, or national or ethnic origin merely because members of the relevant religious community may also share ancestry or ethnic characteristics,” the proposed regulations stated.

The proposed rules would be subject to public comment for 60 days. The IRS said it is aiming for the finalized rules to take effect for the taxable years beginning after May 31, 2027.

Bianca Quilantan and Isa Dominguez contributed to this report.