If he is formally arrested he would be the first former Taiwan president to be formally taken into custody.
However, any decision on making an arrest will have to come from a judge following a request from prosecutors.
"Chen has been arrested and we are seeking approval of the Taipei district court to (formally) detain him," a spokesman for the investigating team told AFP.
Earlier, speaking to reporters before entering the building, Chen said he expected to be arrested saying the prosecution moves against him were linked to attempts by his successor, Ma Ying-jeou, to placate China following violent protests last week against a visiting Chinese envoy.
"Long live Taiwanese democracy," Chen declared to his supporters outside the prosecutor's office. "Long live Taiwanese independence".
Dozens of Chen's supporters had gathered outside the prosecutor's offices during the questioning, with riot police deployed to prevent them from entering the building.
Chen was a firm supporter of Taiwan independence and frequently sparred with Beijing over the issue.
Taiwan and mainland China split at the end of the Chinese civil war in 1949 and Beijing regards the island as a renegade province.
The mainland government has vowed to use force if necessary to prevent Taiwan from declaring formal independence.