IRS said to probe derivatives trades

LONDON (CNNMoney.com) -- The Internal Revenue Service is seeking information from Citigroup and Lehman Brothers to determine whether they helped hedge funds with trades designed to avoid taxes, the Wall Street Journal reported Thursday.

The requests for information relate to the use of derivatives by offshore investors, the newspaper said, citing people familiar with the matter.

Derivative trades involve securities firms buying stocks from offshore hedge fund clients and in return paying them the return of the stocks and any dividends they generate, it said.

With these trades, hedge funds don't have to pay the taxes on the dividend since the fund doesn't technically hold the stock, the Journal said.

A Citigroup (Charts, Fortune 500) spokesman told the newspaper that the banking giant is cooperating with the IRS and answering any questions. Spokespeople for Lehman (Charts, Fortune 500) and the IRS declined to comment to the Journal.