The former centreback, who led Italy to glory in Germany in 2006, has had property and other assets worth €900,000 confiscated in connection with an ongoing probe into a luxury boat rental business that Cannavaro, 41, ran with his wife.
In a statement, prosecutors in Cannavaro's home city of Naples, said they suspected that three multi-million-euro vessels supposedly available for rental through the company were in fact exclusively for the couple's private use.
As such, Cannavaro and his wife, Daniela Arenoso, 40, should have declared them as taxable assets and not been able to benefit from the various tax breaks for which only companies are eligible.
Tax inspectors have estimated that the operation of what was effectively a sham company, FD Service, enabled the couple to avoid more than €1 million in taxes and VAT between 2005 and 2010.
The prosecutors said that they had obtained evidence of Cannavaro's direct involvement in the fraud and of other, unspecified, illegal actions in relation to the company.
Also under investigation is Eugenio Tuccillo, described by prosecutors as an individual of limited means to whom Cannavaro sold the business shortly after the opening of the tax probe.
Almost immediately after taking over, Tuccillo put the company into administration in what inspectors suspect was an attempt to hide the fraud.
A national sport
In an illustrious playing career, Cannavaro played for Napoli, Parma, Internazionale, Juventus and Real Madrid before a final stint with Al-Ahli in Dubai, where he is currently assistant coach.
His movie-star looks, 136 caps and rise from the back streets of Naples to the summit of world football have made him a national icon in Italy, a country that prizes defenders like no other.
Famed for being as tough on the pitch as the teak on one of his boats, Cannavaro had, until now, also enjoyed a squeaky-clean image as a family man.
The latest revelations may not sully that reputation too much as tax dodging is often referred to as the second national sport in Italy. Numerous high-profile figures have been accused of cheating on their returns.
A government report published last month estimated that tax evasion currently costs the state €91 billion per year, equivalent to six percent of the country's annual output.
News of the allegations against Cannavaro emerged a day after the financial police announced they had broken up a ring of companies they believe used false accounting to defraud the state out of €1.7 billion.
Prime Minister Matteo Renzi has promised a crackdown on tax dodgers and has vowed to end the country's tradition of regular amnesties for offenders as part of broader package of reforms intended to make the country easier to govern, more business-friendly and stronger financially.
Well-known names who have been previously accused or convicted of illegal tax evasion include fashion designers Giorgio Armani, Domenico Dolce and Stefano Gabbana.
Former prime minister Silvio Berlusconi is currently doing community service in a retirement home as his punishment after being convicted of tax fraud.