An alleged $165 million tax fraud syndicate stretching from one of the country's highest tax officials to struggling drug addicts was almost derailed by a secret extortion bid and a lowly recruit who went rogue before federal police blew the conspiracy open on Thursday.

The biggest white-collar fraud racket in Australian history unravelled after 300 federal police officers raided 28 properties and arrested nine people, including the son and daughter of Australian Taxation Office Deputy Commissioner Michael Cranston.

Mr Cranston has been issued with a future court attendance notice for allegedly abusing his position as a public officer by trying to access restricted information on an audit involving his son.

The extraordinary investigation has implicated high-ranking lawyers, tax office workers and veteran journalist Steve Barrett who has not been charged but has been accused by police of extorting $5 million from the syndicate after members had a falling out.

Police allege $165 million was amassed in just a year by a group of high-flying school friends and business associates including Mr Cranston's son Adam, 30, Vaucluse businessman and former television sports commentator Jason Onley, 47 and Dev Menon, 33, a tax lawyer at Clamenz Lawyers who boasted online of his years of experience and "innovative approach to tax".

Mr Cranston's daughter Lauren, 24, and friend Devyn Hammond, 24, allegedly worked from laptops in a rented office in the Sutherland Shire, keeping detailed logs of illegal payments, companies and bank accounts.

The syndicate allegedly ran a legitimate payroll company, Plutus Payroll, and accepted money from legitimate clients, including several government departments, to process payroll on their behalf.

They set up seven sub-contracted companies, or tier 2 companies, in mid 2016 and recruited unwitting drug addicts and welfare recipients to act as "straw directors" who provided a front for the syndicate.

The tier 2 companies made payroll payments but withheld small amounts of PAYG each time, gradually siphoning it off to the syndicate.

Some members also ripped off the straw directors, promising them $1000 a week but "clipping" off $500 to $800 for themselves, according to documents tendered in Central Local Court on Thursday.

The documents reveal that the syndicate almost derailed in February, when Daniel Rostankovski, whose job it was to manage all the straw directors, believed someone in the syndicate had secretly taken $25 million.

Police allege that at a meeting at Clamenz Lawyers on February 1, Mr Rostankovski, 28, and Mr Barrett, 59, blackmailed the group, demanding $5 million or Mr Barrett would expose the syndicate in the media.

The group complied, using complex systems to disguise the payment in exchange for an agreement that the ATO, the police or the media would not be notified.

In another close call, one of the straw directors turned rogue, locking the syndicate out of a tier 2 company's bank account and withdrawing $25,000.

In late January, the syndicate appeared rattled when the ATO served garnishee orders on several tier 2 companies regarding unpaid PAYG.

In an intercepted phone call, Adam Cranston said he was getting his father to "look into it".

"He is looking into it but considering he doesn't know about it, it can't be like the biggest thing since Ben Hur," he allegedly told Mr Menon.

"There is no question this would be the biggest tax fraud," Mr Menon replied.

Michael Cranston, who had pioneered much of the ATO's tax avoidance work, allegedly instructed two ATO officers to look up restricted information relating to an audit.

The trio did not know about the syndicate but they have been suspended and an internal investigation has been launched.

On Thursday, acting ATO Commissioner Andrew Mills said he was confident the ATO's systems had not been breached.

"The investigation has so far not revealed any evidence of actual intervention or influence on audit cases, or of money being refunded, or of tax liability being changed," he said.

He described Michael Cranston as one of the organisation's "long-serving senior officers" who had "quite an illustrious [career] up until this point".

AFP Deputy Commissioner Leanne Close said the syndicate appeared to use the money to fund a "lavish lifestyle".

Among the items seized under proceeds of crime were 25 motor vehicles, including luxury cars and racing cars, 12 motorbikes, 18 residential properties, two aircraft, $1 million from a safe deposit box, firearms, jewellery, bottles of Grange wine and artworks. More than 100 bank accounts were closed.

Some money was allegedly laundered through Rommark Corporation, a property development firm run by eastern suburbs identities Michael Teplitsky and Boris Markovsky. The pair are not suspected of being involved in the alleged fraud.

Six people have been charged with conspiracy to defraud the Commonwealth, three have been charged with blackmail offences and two charged with dealing with proceeds of crime.

Seven members appeared in court on Thursday were granted strict bail and offered large sums of money as surety.

Plutus Payroll, a preferred tender for federal government payroll services, had its accounts frozen earlier this month.

Workers from the Department of Justice, Transport NSW, the NDIS and Department of Defence were among those who complained of not being paid.

with Louise Hall