Investigators from the agency's security and internal affairs division are to report back by the end of the year, and their findings will be made public, commissioner Andrew Treusch said Friday in a statement.
The agency will immediately call in the police if the investigation uncovers possible criminal behaviour, he added.
"This week, questions have been raised in the media about a cheque issued in 2007 to Mr. Nicolo Rizzuto," Treusch said.
"I have made initial inquiries into this transaction, and, to date, have been advised of no criminal wrongdoing."
The Harper government said it considers any misconduct by tax officials unacceptable.
"We are acting to hold people accountable," Revenue Minister Kerry-Lynne Findlay's office said in a statement issued through her spokesperson.
"Today, the commissioner of the Canada Revenue Agency initiated an internal investigation to look into how this cheque, which has since been fully recovered, was incorrectly issued to Nicolo Rizzuto in 2007.
"We are committed to cracking down on crime and protecting the integrity of our tax system."
The statements follow a published report that the Canada Revenue Agency issued the refund to the now-deceased Rizzuto despite his owing the taxman $1.5 million.
Rizzuto had just been arrested as part of a sweeping police operation in November 2006 and sent to prison. The elderly Mob boss was eventually released. He was murdered in his kitchen in 2010.
Enquete, an investigative program on Radio-Canada, says Rizzuto received a cheque dated Sept. 13, 2007, for more than $381,737.
Jean-Pierre Paquette, a former Canada Revenue Agency auditor, told the French-language CBC network that he told the Rizzuto family not to cash the cheque and even went to Rizzuto's home to retrieve it.