The Internal Revenue Service is making a priority of cracking down on complex financial instruments created by banks such as UBS AG and Citigroup Inc. that are designed to help offshore hedge funds avoid a 30 percent dividend tax.

IRS Commissioner Doug Shulman said yesterday that the tax-collecting agency designated these instruments, called derivatives, a "Tier 1" issue, requiring auditors to flag the transactions when they encounter them during examinations, examine how they are structured, and report them to the national IRS office to be cataloged.

The agency was criticized in September by the Senate's Permanent Subcommittee on Investigations for looking the other way while securities firms sold complicated financial products designed to skirt laws requiring them to withhold U.S. taxes on stock dividends paid to offshore investors.

"The tier-issue process will provide the needed organizational priority and coordination to ensure taxpayer compliance with the U.S. withholding tax provisions," Shulman said at a conference of tax lawyers in Washington.

The Senate panel's report said Citigroup, Morgan Stanley and Deutsche Bank AG also profited by creating and selling "dividend-enhancement" products with no legitimate investment purpose besides enabling investors to avoid taxes.

Morgan Stanley's dividend-enhancement products generated $25 million of revenue for the company in 2004 alone, and cost the U.S. government more than $300 million in unpaid taxes from 2000 through 2007, the report said.

Separately, Shulman said he intended to expand a program the IRS started with Canada, Australia, Japan, and the United Kingdom that allows the tax agencies to share information daily about abusive tax shelters as well as the banks, lawyers and accountants that promote them.

Shulman said he wanted to expand the program, known as the Joint International Tax Shelter Information Center "beyond its roots in combating tax shelters" to include broader areas of cooperation. Countries participating currently only exchange information about specific transactions.