Officials from the Department of Finance and the Revenue Commissioners said they are investigating recent media reports that so-called vulture funds are using a clause in Irish law to pay small amounts of tax here.
Minister for Social Protection Leo Varadkar said the Government is "very concerned" at suggestions that vulture funds may be using tax avoidance methods in Ireland.
The minister said that Ireland needs to make sure that the country's tax base is not eroded and that no reputational damage is done to the country.
He said once the investigation by the department and Revenue has concluded, the Government will see if any changes are required to legislation.
The minister said he did not know how long the investigation would take.
Meanwhile, Sinn Féin deputy leader Mary Lou McDonald has described the allegations as "outrageous".
Ms McDonald said that the Government needs to understand that this is an urgent matter and legislation needs to be brought in to close the loophole.
The Dublin Central TD also called on the Department of Finance to explain how long this has been going on and who knew about it.
The Sunday Business Post reported that companies, which have spent billions of euro in acquiring loans in Ireland and are now making tens of millions from property here, are paying as little as €250 to Revenue.
Although the activity is legal, the Department of Finance told RTÉ News that if their investigations "uncover tax avoidance schemes or abuse, which erodes the tax base and causes reputational issues for the State, then appropriate action will be taken".
It said that any necessary legislative tax changes that may be required will be put forward for the consideration of the Minister for Finance.
In a statement, the department added: "The companies in question have been purchasing bundles of loans from financial institutions. A number of these funds are using special purpose vehicles known as section 110 companies."
Section 110 Taxes Consolidation Act 1997 sets out the taxation regime for securitisation and other structured finance transactions.
The department said: "Under the Taxes Acts a qualifying section 110 company is chargeable to tax at 25% but has its profits computed by reference to the rules applicable to trading companies.
"As a result, the companies are generally structured in such a way that they are effectively tax-neutral."
Fine Gael's Noel Rock, who is a member of the Public Accounts Committee, has called for Section 110 of the Tax Consolidation Act to be significantly amended.
Mr has put forward a Private Members' Motion to achieve this, which will be considered for debate when the Dáil reconvenes.
"The goal of the Private Members' Bill is to amend the definition of qualifying assets under section 110, to remove reference to financial assets - thus protecting those who use this provision for tangible assets and excluding those who don't. This would also minimise the distorting effect on our GDP, which currently means an inflated contribution to the EU," said Mr Rock.