The Public Accounts Committee (PAC) has denounced the government's new tax credit system as a "nightmare".
Tax credits are designed to help working families on low incomes
In their second report so far the MPs say tax credits have been routinely overpaid to 1.8 million claimants.
The committee also claims that the system may be fatally undermined by its complexity.
The PAC's chairman, Edward Leigh MP, says there is now a question mark over the government's ability to make tax credits fair and effective.
Mr Leigh and his committee colleagues subjected the Inland Revenue - now part of HM Revenue and Customs - to some of the most scathing criticisms it has ever received.
Describing the system as a "nightmare" and "frustratingly arcane" he said: "The Revenue has yet to produce reliable evidence that the flood of public money being wasted under the previous tax credits scheme through fraud and error has been stemmed to any degree."
The old Working Families and Disabled Person's tax credits were replaced in April 2003 by Child Tax Credits and Working Tax Credits.
In the year 2003-2004, £16bn was handed out to 5.7 million families.
But the MPs say 1.8 million of the claimants were routinely overpaid. They then had to cope with demands for repayments despite many of them being vulnerable people in desperate financial circumstances.
"It's hit very badly some of the more vulnerable people in society, because the system regularly gives them overpayments at the start of the year," Mr Leigh told Radio 4's Today programme.
"Now that might sound a good thing but of course the revenue demands it back later in the year and these people are on very tight incomes."
The executive Chairman of HM Revenue and Customs, David Varney, disagreed with some of these criticisms: "We reject any assertion that overpayments have occurred because the tax credit system is either unduly complex or hard to implement" he said.
"This is a system benefiting over 6 million families, the vast majority of whom have faced no difficulties with their payments. We have already put in place many improvements to deal with the problems raised."
Computer records deleted
The committee first reported on the system's problems in April 2004. They revealed that these were severe, with several hundred thousand claimants not being paid on time.
Now, the report says, the Revenue has failed to improve matters, with no evidence that the newer system has reduced the previous error rate of between 10 and 14% in dealing with claims.
Today's report also reveals that computer housekeeping has been routinely deleting claimants' records for many years, denying payments to some while allowing some overpayments to go unrecovered.
Earlier this year the system of tax credits was severely criticised by both the Parliamentary Ombudsman and the Citizens Advice Bureaux.
The Prime Minister Tony Blair has already apologised for the problems while his Chancellor Gordon Brown has pledged to reform the system.