HM Revenue and Customs lost up to £1.74 billion of taxpayers' money in tax credit fraud, error and overpayments, according to official figures published yesterday.
The National Audit Office (NAO) condemned this figure as "unacceptably high" and has subsequently qualified the department's accounts for the fourth year running.
The government noted that the sum - of which up to £1.28 billion was lost in fraud and error, the equivalent of 10.6 per cent of the total value of tax credit payments - was for 2003-4, and insisted there have improvements since then.
However, the Conservatives and Liberal Democrats warned it was just another sign of the crisis facing the tax credit system, with the former saying the financial watchdog's report was "embarrassing beyond belief" for chancellor Gordon Brown.
The NAO figures show that also last year, HMRC wrote off £397 million in overpayments it made that it did not expect to recoup, and make provisions for a further £409 million in which repayment was doubtful.
Of this £397 million, £130 million was written off as having being lost to organised crime. Last December, HMRC was forced to close the online tax credits application system due to an attack by criminal gangs.
More than 40 investigations are currently being carried out into organised fraud in the tax credit system, and today's report reveals there were 62,000 fraudulent claims made through the e-portal last year, of which 33,000 were successful, at a cost of £55 million.
"The first full results of the new tax credit scheme since its introduction in April 2003 show that the level of claimant error and fraud was unacceptably high," said auditor general John Bourn.
"I have therefore once again qualified my audit opinion on the trust statement. HMRC must now use this baseline figure to continue to target future reductions in error and fraud."
Speaking to the House of Commons yesterday, paymaster general Dawn Primarolo insisted the tax credit was benefiting six million families and ten million children, and highlighted a take-up of 93 per cent among families on less than £10,000 a year.
The money lost to claimant fraud and error was less than under the old working families tax credit (14 per cent), she said, adding that changes to the IT system and fraud measures meant this year's figure would be better.
However, shadow paymaster general Mark Francois said the tax credit system was "in meltdown" and warned Ms Primarolo's position was looking increasingly shaky.
"But the real culprit in all this remains Gordon Brown. The Labour manifesto of 1997 said that 'we must crack down on dishonesty in the benefit system'," he noted.
"This is not a crackdown it's a meltdown - and it's the chancellor's meltdown. It is he more than anyone who has let low income families down and he who should ultimately be held to account."
Liberal Democrat work and pensions spokesman David Laws repeated his call for Ms Primarolo to resign, saying the Treasury was "in a state of denial" about the problems facing one of its pet projects.