A company spokesman told Reuters an investigative team was at the headquarters but declined further comment. A prosecution spokesman could not be immediately reached for comment.
The investigation is the latest involving the flag carrier's owning family, which came under increased scrutiny in April after the chairman's daughter, Cho Hyun-min, allegedly threw water at an attendee of a business meeting.
Cho Hyun-min is the younger sister of Heather Cho, who was jailed in 2014 for demanding a Korean Air plane return to its gate at a New York airport, after losing her temper over the way she was served nuts in first class.
The Seoul Southern District Prosecutors' Office is investigating suspicion of tax evasion, embezzlement and breach of trust by Korean Air Lines Chairman Cho Yang-ho and members of his family, Yonhap reported citing prosecution sources.
The prosecutor's office began investigating potential tax evasion by the family after the Seoul office of South Korea's tax agency questioned whether Chairman Cho paid tax on inheriting overseas assets from his father, Yonhap said.
Prosecutors are also tracking suspicious money flows within accounts of Cho family members and associates, Yonhap reported.
Chairman Cho earlier this month stepped down from the post of co-chief executive at affiliate Jin Air amid growing public pressure for Cho family members to step back from management positions.