IRS eyes firms' derivative use

The Internal Revenue Service is seeking information from Citigroup and Lehman Brothers, The Wall Street Journal said. The New York-based firms have received information document requests on offshore investors’ use of derivatives in order to dodge taxes on U.S. stock dividends, sources told the Journal. The major concern is the derivatives trades in which securities firms purchase stocks from hedge fund clients and then pay them returns and dividends, the Journal said. Participating hedge funds save on taxes because technically they aren’t holding the stock. In its investigation, the IRS is looking into the reasons for these trades: Were they made for economic reasons or to evade taxes? Firms using these trades have sidestepped more than $1 billion in withheld taxes, cash that is now at stake during the IRS’ probe, accountants told the Journal.