It has come to light that more than £5 billion has been written off by HM Revenue and Customs (HMRC).
A report published by the National Audit Office found that during 2011 to 2012, around £1.25 billion in tax credits were overpaid, while £290 million was underpaid, due to errors and fraud.
Commenting on the figures, chairman of the House of Commons Public Accounts Committee Margaret Hodge expressed shock at the "sheer scale of waste and mismanagement" by the tax authority.
Recommendations put forward by the report include HMRC developing a better understanding of the costs associated with its interventions, as well as getting to grips with the risks involved.
"Before implementing significant structural changes, the department needs to be clear about what its future operating model will be," said the document.
Earlier in the week, local government minister Bob Neill unveiled figures that show local councils also mismanaged tax collection, with £2 billion in levies still outstanding across the UK.