The company refused to comment on reports in the US that the investigation centred on allegations that it improperly avoided paying taxes. IBM said the inquiry was a "normal, routine procedure" but refused to divulge any details.
News of an investigation knocked IBM's share price in New York. Traders on Wall Street marked the stock down to $122.50 from $123.19 in pre-opening trading.
According to The Wall Street Journal IBM avoided paying as much as about $500m (pounds 330m) in UK taxes between 1991 and 1996. It said IBM increased the royalties its British unit paid to the US parent on goods and services sold in Britain by raising to 12 per cent from 8 per cent.
If true, it would mean IBM lowered the operating profit of its British unit, and thereby lowered its British taxes. It would also mean a corresponding increase in operating profit for IBM's business in the US, where IBM did not pay taxes between 1991 and 1993 because it was making losses. US operations became profitable again in 1994.
The allegations had been made to the Inland Revenue by a former IBM UK sales and marketing manager, Gerard Churchhouse, who was fired in 1995, the paper said.
IBM's statement said: "IBM is currently working with the Inland Revenue on an inquiry. This is a normal and routine procedure, and IBM is cooperating fully. IBM has no comment with regard to Mr Churchhouse or his allegations." The Inland Revenue refused to discuss the matter, saying it was bound by rules on confidentiality.
The Journal said Churchhouse alleged IBM's parent ordered its British unit to boost royalty payments in 1991. The 4 per cent point increase in 1991 amounted to pounds 160m in extra royalties that year. Mr Churchhouse estimated the total amount of royalty increases from 1991 to 1996 was as much as pounds 900m, and that IBM avoided paying roughly pounds 300m over that period. The Revenue has been investigating IBM's financial records for about two years, the paper said.
It said IBM fired Mr Churchhouse in 1995 and that his allegations were part of a lawsuit he later filed against the company in New York's Supreme Court. The lawsuit, which was dismissed earlier this year, did not specifically address the merits of his tax allegations.