The tax status of the Church of Scientology in the United States has been the subject of decades of controversy and litigation. Although the Church was initially partially exempted by the Internal Revenue Service (IRS) from paying federal income tax, its two principal entities in the US lost this exemption in 1957 and 1968. This was due to concerns that church funds were being used for the private gain of its founder L. Ron Hubbard (according to the IRS) or due to an international psychiatric conspiracy against Scientology (according to Scientology).
In the course of a 37-year dispute with the IRS, the church was reported to have used or planned to employ blackmail, burglary, criminal conspiracy, eavesdropping, espionage, falsification of records, fraud, front groups, harassment, money smuggling, obstruction of audits, political and media campaigns, tax evasion, theft, investigations of individual IRS officials and the instigation of more than 2,500 lawsuits in its efforts to get its tax exemption reinstated. A number of the church’s most senior officials, including Hubbard’s wife, were eventually jailed for crimes against the United States government related to the anti-IRS campaign. The IRS, for its part, carried out criminal investigations of the church and its leaders for suspected tax fraud and targeted the church as a “dissident group” during the Nixon administration.
Although the church repeatedly lost in legal cases which were heard up to the level of the Supreme Court, it undertook negotiations with the IRS from 1991 to find a settlement. In October 1993, the church and the IRS reached an agreement under which the church discontinued all of its litigation against the IRS and paid $12.5 million to settle a tax debt said to be around a billion dollars, and the IRS granted 153 Scientology-related corporate entities tax exemption and the right to declare their own subordinate organizations tax-exempt in future.
The terms and circumstances of the agreement remained secret until details emerged through leaks and litigation from 1997 onwards. They have attracted controversy for their perceived favorability towards the church and have been described as unconstitutional by federal courts for their bestowal of privileges on Scientologists that are shared by no other religious group. Questions have also been raised about whether the IRS exceeded its authority by effectively overruling the Supreme Court in setting the terms of the agreement and permitting tax deductions not authorized in law. However, legal commentators have concluded that the agreement can effectively no longer be challenged in court.