Appearing on CNN's State of the Union Sunday morning, Graham said that Reid, who had made the accusation last Thursday on the Senate floor, was "lying."
"What he [Reid] did on the floor of the Senate is so out of bounds. I think he's lying about his statement, of knowing something about Romney," Graham said.
Reid claimed that an unidentified investor at Bain Capital, Romney's former private equity firm, had tipped him off about Romney's alleged tax evasion.
"The word's out that he hasn't paid any taxes for 10 years," he said before the Senate. "Let him prove he has paid taxes, because he hasn't."
Romney has said he will not release his tax returns beyond his 2010 and 2011 filings, leading to speculation about what earlier files might reveal about the Republican presidential candidate with a net worth of $200 million.
"When it comes to answering the legitimate questions the American people have about whether he avoided paying his fair share in taxes or why he opened a Swiss bank account, Romney has shut up. But as a presidential candidate, it's his obligation to put up and release several years' worth of tax returns, just like nominees of both parties have done for decades," Reid said in a statement, defending the accusation against Romney.
Graham questioned the legitimacy of Reid's source and described the accusation as a distraction from the "real issues" in the presidential campaign.
"I just cannot believe that the majority leader of the United States Senate would take the floor twice, make accusations that are absolutely unfounded, in my view, and quite frankly making things up to divert the real campaign away from the real issues," he said on CNN.
Watch the clip from the CNN interview below: