Federal enforcement of civil rights compliance keeps finding new channels. This week’s comes from an agency that compliance teams do not usually consider.

On September 4, the Department of the Treasury and the IRS published proposed regulations that would tie a private school’s federal tax-exempt status directly to a broad nondiscrimination standard. If finalized, a private school could lose its exemption under Section 501(c)(3) for any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in admissions, scholarships and loans, athletics, or any other school-administered or school-supported program. The proposal reaches independent K-12 schools alongside private colleges and universities. Treasury and the IRS estimate it could affect roughly 18,000 private schools and 750,000 students nationwide.

The proposed rule builds directly on the Supreme Court’s 1983 decision in Bob Jones University v. United States, which upheld the IRS’s authority to revoke tax-exempt status from schools with racially discriminatory policies because that discrimination violates a fundamental public policy the federal government will not subsidize. Treasury and the IRS would now write that principle into regulatory text, and in doing so, would remove an exception that has stood for 50 years. Current guidance allows a school to use race-conscious scholarships or outreach if the purpose is to promote its own nondiscriminatory policy or remedy past discrimination. The proposed rule would eliminate that exception, treating race-conscious programs the same as any other form of discrimination regardless of the intent behind them.

New interagency agreements between the ED, DOJ, HHS, and DOL, along with OCR’s expanded use of directed investigations, have already been reshaping how civil rights compliance gets enforced this year. Tax-exempt status gives private schools a separate point of exposure. Losing Section 501(c)(3) status would happen through the IRS’s ordinary authority over tax exemption rather than a civil rights enforcement action, and the consequences reach beyond the school itself. Donors lose the ability to deduct contributions, and the school’s income becomes subject to federal tax.

There’s a wrinkle here for anyone thinking about workarounds. Treasury and the IRS expect that many private schools will shift toward income, geography, or first-generation status as substitute eligibility criteria for scholarships once race-based criteria are off the table. That shift is not automatically safe. DOJ’s July 2025 guidance to federal funding recipients warns separately that facially neutral criteria can still create legal exposure when they are selected or applied with the intent to function as a substitute for race. Swapping the wording of a policy does not resolve how a regulator or a court reads its purpose and effect.

This is a proposed rule, still open for public comment through November 3, 2026. If adopted as written, the change would apply to taxable years beginning after May 31, 2027. Private K-12 schools, colleges, and universities have time to act before that date, and starting the review now beats waiting for a final rule. A reasonable next step is inventorying admissions, scholarships, and financial aid, and any mentoring or pipeline programs that currently use race or ethnicity as a factor, then documenting the legitimate purpose behind how each one is designed.

Compliance reviews that move agency by agency are increasingly incomplete. The same program can now draw scrutiny from OCR, DOJ, and the IRS at once, each applying its own standard and its own consequence.

Over the past several months, we have talked repeatedly about a changing federal enforcement landscape—one in which institutions should be thinking beyond any single agency or enforcement mechanism.

This month brought another example.

On September 4, the Department of the Treasury and IRS published proposed regulations addressing racial nondiscrimination by tax-exempt private schools. If finalized, the regulations would expressly tie an institution’s eligibility for tax-exempt status under Section 501(c)(3) to compliance with a broad prohibition against discrimination based on race, color, or national or ethnic origin. Importantly, the proposal would apply to independent K–12 schools as well as private colleges and universities.

What is being proposed?

The proposal builds on the Supreme Court’s decision in Bob Jones University v. United States and longstanding IRS guidance establishing that racial discrimination contrary to fundamental public policy is inconsistent with Section 501(c)(3) status.

But the proposed regulations would put that principle expressly into regulatory text—and would make clear that the prohibition reaches much further than admissions.

Under the proposal, a private school could jeopardize its tax-exempt status if it maintains a discriminatory policy or practice involving admissions, educational policies, scholarships or loans, athletics, or other school-administered or school-supported programs.

The proposal also would eliminate existing IRS provisions that contemplate certain race-conscious practices intended to promote nondiscrimination.

That makes this particularly significant for scholarships, pipeline and mentoring programs, summer programs, and other initiatives that may have historically used race or ethnicity as an eligibility or participation criterion.

Why are we watching this?

Because this development fits a larger pattern we have been discussing in the Tuesday Takeaway.

Federal civil rights enforcement is increasingly difficult to view solely through the traditional lens of an OCR investigation.

We have already discussed increased coordination between the Department of Education and Department of Justice, the use of interagency agreements, DOJ involvement in enforcement, and heightened scrutiny of admissions, scholarships, pathway programs, and other programs that consider race.

Now, for private educational institutions, tax-exempt status potentially becomes another enforcement lever.

The proposed regulations would not create a new civil rights enforcement process within the IRS. Instead, the consequence would come through the IRS’s existing authority over tax exemption: a school determined not to satisfy the standard could lose its Section 501(c)(3) status.

And that consequence is significant. Loss of tax-exempt status could affect not only an institution’s tax obligations, but also its ability to receive tax-deductible contributions.

The compliance challenge is getting broader

There is another wrinkle worth watching.

The proposal suggests that institutions might use criteria such as income, geography, or first-generation status instead of race-based eligibility criteria. But, DOJ guidance has separately warned that seemingly race-neutral criteria—including socioeconomic status, geography, and first-generation status—may create concerns if they are intentionally being used as proxies for race.

That reinforces a point we have made before: changing the words in a policy may not be enough.

Institutions should be looking at the purpose, design, implementation, documentation, and actual operation of programs—not simply whether race appears expressly in the eligibility criteria.

The Tuesday Takeaway

This is a proposed regulation, not a final rule. If finalized as proposed, it would apply to taxable years beginning after May 31, 2027.

But institutions do not need to wait for a final rule to understand the larger message.

The federal enforcement landscape continues to expand.

For private schools and institutions, compliance risk may now involve OCR, DOJ, federal funding, litigation—and potentially the IRS and tax-exempt status. Different agencies may have different authority and different consequences, but increasingly they are examining overlapping institutional practices.

For independent schools and private colleges and universities, now is a good time to inventory race-conscious programs and review admissions, scholarships and financial aid, athletics, pipeline and mentoring programs, donor-restricted funds, and other school-supported initiatives—including how eligibility criteria were selected and how the institution has documented the legitimate objectives behind them.

The takeaway is not that every program must change tomorrow. It is that compliance reviews can no longer be conducted agency by agency or policy by policy. As federal enforcement tools multiply, institutions need to understand how the same practice may look through several different legal and regulatory lenses.