The U.S. Internal Revenue Service is challenging some of the tax deals structured by AIG Financial Products Corp, the unit of the giant insurer that has caused political outrage over $165 million in employee bonuses, the Wall Street Journal said.

Some banks that received government-funded payouts to settle contracts with American International Group turned to the insurer for help cutting their income taxes in the U.S. and Europe, the paper said, citing court records and people familiar with the business. The company paid $61 million last year in disputed taxes stemming from the deals, but sued the U.S. government last month in federal court in New York, seeking a refund, the paper said, citing filings in the case.

Banks that worked with AIG on tax deals include France's Credit Agricole SA , Bank of Ireland and Bank of America Corp , the paper said, citing AIG's lawsuit. The banks declined to comment to the paper.

In general, AIG's tax deals permitted U.S. companies and foreign banks to effectively claim credit in their home country for a single tax payment, partly through the use of an offshore AIG subsidiary, the paper said.

In its lawsuit against the government, the insurer said it was told by the IRS that AIG hadn't shown that the transactions had sufficient economic substance and business purpose to justify tax benefits, the paper said. The IRS declined to comment to the paper.

An AIG spokesman declined to discuss with the paper the tax-cutting transactions in detail but asserted that the tax benefits were proper and justified, the paper said. AIG wants to ensure that it is not required to pay more than its fair share of taxes, the paper cited the company spokeswoman as saying.

AIG, the IRS, Credit Agricole SA, Bank of Ireland and Bank of America could not immediately be reached for comment by Reuters.

(Reporting by S. John Tilak in Bangalore; Editing by Hans Peters)

Aig Deals