Since the early 1970s, the IRS has embraced racial nondiscrimination requirements as an express condition of Section 501(c)(3) status for private schools. Such racial nondiscriminatory policy must be well publicized and applies to all facets of student life: admissions, financial aid, and all school programs. Here’s what leaders at private schools need to know about the policy requirements, legal compliance, and related practical aspects.
1. How did the IRS develop this racial nondiscriminatory policy requirement?
The origins of today’s nondiscrimination policies for schools date back to the landmark Supreme Court 1954-decision, Brown v. Board of Education, which ruled separate public schools for black and white students unconstitutional. In 1970, the IRS extended the racial nondiscrimination laws beyond public schools by creating an internal policy mandating that all private schools seeking to qualify for Section 501(c)(3) tax exemption must operate on a racially nondiscriminatory basis. The policy was formalized in 1975, when the Service issued Revenue Procedure 75-50, which sets forth the racial nondiscriminatory policy requirements for private schools exempt under Section 501(c)(3).
Under this IRS guidance, prohibited racial discrimination includes discrimination on the basis of race, color, national, or ethnic origin. Private schools may address other protected classes in a comprehensive nondiscrimination policy, based on other federal, state, or local anti-discrimination laws. For example, nonprofit private schools (other than schools run or controlled by religious organizations) must comply with the American with Disabilities Act’s nondiscrimination requirements, and the publication of such information may be beneficial overall.
2. How may private tax-exempt schools comply with the IRS-mandated notice requirement?
A private school’s racial nondiscrimination policy notice must include the following elements:
Identify the school. If the name of the school appearing in its Articles of Incorporation and the name under which the school operates are different, both should be identified in the notice.
Be published annually. Newspaper or broadcast media may be used as publicity tools but the policy must be announced to all segments of the general community served by the school during the period of solicitation for students or, in the absence of a solicitation program, during the school’s registration period. Note that the policy on a website does not satisfy the IRS’s notice requirement; the options for compliance have not been updated or modified to reflect modern technological advancements.
Be formatted correctly. The notice may be combined with an advertisement for enrollment and it must occupy at least three column inches (vertically or horizontally) and be captioned in at least 12-point bold face type as follows: Notice of Nondiscrimination Policy As To Students (text must be printed in at least 8-point type). A sample policy might read: The school does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admission policies, scholarship, and loan programs and athletic and other school administered programs.
Be published in other school materials. The policy must also be published in all brochures and catalogs dealing with admissions, programs, and scholarships for the school, as well as written advertisements for recruiting students.
Be documented. A school must provide documentation that the means by which this policy was communicated to all segments of the general community was reasonably expected to be effective.
3. Are any exceptions from these public notice requirements available?
Yes, the publicity requirement is not required if the school follows a racial nondiscrimination policy as to students and meets one of the available exceptions:
a. The school is church-related and in the preceding three years at least 75 percent of the students are members of the sponsoring religious denomination;
b. A substantial portion of the students are from a large geographic area; or
c. The school currently enrolls a meaningful number of minority students or promotional and recruiting activities were reasonably designed to inform minority students in the area of the availability of the school.
4. How do private schools comply with the recordkeeping requirements?
A school must not only publish its racial nondiscrimination policy, it must preserve the information necessary to demonstrate compliance with these requirements. A school thus should track admission data as well as scholarship and financial aid recipient information. The school also should retain copies of its promotional materials for recruiting students.
5. How does the IRS check up on a school’s compliance with these requirements?
The IRS monitors school compliance with the foregoing nondiscrimination policy procedures at two critical junctures: (1) during the school’s initial IRS Form 1023 application for tax-exempt recognition under Section 501(c)(3); and (2) annually through the IRS Form 990 information.
When a school initially applies for tax-exempt recognition, it must include a completed Schedule B to the IRS Form 1023 application. Section II of Schedule B addresses the establishment of a nondiscrimination policy, with questions about the school’s anticipated racial mix and the projected demographics of its loan and scholarship recipients.
When a school later files its annual IRS Form 990 returns, it may report legal compliance via Schedule E of Form 990 (similar to the IRS Form 1023’s Schedule B). Through this Schedule E, an individual authorized to take official action on behalf of the school must certify annually under penalties of perjury that, to the best of his or her knowledge and belief, the school continues to satisfy the applicable requirements of Revenue Procedure 75-50. Schedule E calls for whether the school maintains the following:
a. Records indicating the racial composition of the student body, faculty, and administrative staff;
b. Records documenting that scholarships and other financial assistance are awarded on a racially nondiscriminatory basis;
c. Copies of all catalogues, brochures, announcements, and other written communications to the public dealing with student admissions, programs, and scholarships; and
d. Copies of all material used by the organization or on its behalf to solicit contributions.
Consequently, it is critically important that schools maintain such documentation and other information in the course of its regular operations, as part of its legal compliance.
6. What if a school is not legally required to file a Form 990?
Schools that are controlled by churches, synagogues, and other religious bodies as their “integrated auxiliaries” may be exempt from filing annual Form 990s. In these circumstances, the school is required instead to file IRS Form 5578, Annual Certification of Racial Nondiscrimination for Private Schools. This form confirms that a school has complied with Revenue Procedure 75-50. The Form 5578 must be filed each year by the 15th day of the fifth month following the end of its tax year. Failure to annually certify compliance and failure to comply with the requirements may be treated as evidence of racial discrimination.
7. What happens if a school fails to comply?
No specific penalty or excise tax exists for failing to comply with the foregoing requirements. Generally, even if a school has not followed one of the above-mentioned requirements, the IRS will usually work with the school to ensure its future compliance. This is especially true if the school’s history and the surrounding facts and circumstances reflect that, in actual practice, it has a racially nondiscriminatory admissions policy. However, revocation of such school’s tax exemption may be deemed appropriate if the facts and circumstances fail to demonstrate compliance with a racial nondiscrimination policy.
8. How should school leaders handle these responsibilities?
School leaders should be careful to retain the necessary documentation, make its racial nondiscrimination policy widely known, and continually seek to promote diversity among its student body. In addition, schools should monitor their demographics carefully, to determine whether any publicity exception applies per No. 3 above. Schools also should responsibly report their ongoing legal compliance via IRS Form 990 Schedule E or IRS Form 5578, as appropriate.