Council tax benefit must be made easier to claim, MPs have said.
The communities and local government committee found too few of those eligible for council tax benefit where claiming the relief, with £2 billion left unclaimed last year.
In its report published today, the committee said the rules governing council tax benefit are too restrictive and recommended the entire process is simplified.
The Department for Work and Pensions (DWP) said it would review the committee's recommendations, but said over five million low-earners were already helped by council tax benefit.
MPs found 1.4 million people were living in poverty but still paying a full council tax bill.
Under the current rules, around 700,000 adults are liable for the full rate, despite not paying any income tax.
Phyllis Starkey, chair of the committee, said it was "unacceptable that a significant number of households in poverty" cannot claim any reduction in their council tax bill.
He continued: "We call on government to urgently review its rules governing council tax benefit eligibility and entitlement to reduce the burden of council tax on low-income households.
"This is key to maintaining the credibility of council tax as a source of local government revenue."
A DWP spokesman responded: "Council tax benefit helps over five million people on low incomes, including over 2.5 million pensioner households.
"It's really important that people claim any money they are entitled to. We will continue to work with local authorities to alert people to their entitlement and make the claim process as simple as possible."
However, he pointed out the recent Lyons report concluded the council tax benefit system did not need reforming.
"We continue to keep eligibility criteria for council tax benefit under review and will carefully consider what the Committee has said about this issue," the spokesman concluded.
Help the Aged said the government had been persistently lobbied over council tax and urged it not to delay any reforms.
Mervyn Kohler, special adviser to Help the Aged, said: " This latest report goes hand in hand with new research from Help the Aged that shows half a million pensioners could be taken out of poverty overnight if the government ensured full take-up of means tested benefits, including council tax benefit.
"There can be no excuse for foot dragging - automatic payment of benefits must be introduced immediately."
He argued households eligible for council tax benefit could be easily identified if agencies improved data sharing.
Around two-thirds of people eligible for council tax benefit claim any funds, the lowest take up of any means tested benefit.