The government's tax credit system lost at least £460m two years ago because of mistakes, or fraud by claimants.
Gordon Brown has promised to overhaul the tax credit system
The estimate is contained in an audit of the Revenue & Customs' accounts by the National Audit Office.
It says although fraud and error was lower than in previous years, it was still unacceptably high.
The report reveals that total overpayment to claimants in 2003/04 has now risen to £2.2bn, with nearly £1bn likely to be written off.
The current tax credits were introduced in 2003 in the form of child tax credit and working tax credit.
But the new system has come under severe criticism this year for being so complex that 1.8 million claimants were overpaid in 2003/04.
Many of them subsequently faced hardship after being asked to repay money they had already spent.
The report from the NAO makes it clear that according to the Revenue's own estimates, some of this money was claimed fraudulently.
Half of all the overpayments were made to just 283,000 families, who had each been overpaid by £2,000 or more.
But so far, reclaiming the money has not been fully effective.
Some £961m of accumulated overpayment from the first two years of the current tax credit system will probably be written off as doubtful debt.
In response to the criticism, a Revenue & Customs' spokesman told BBC News that steps had been taken to tackle fraud.
"We have sophisticated procedures in place to check claimant identities and a set of well tested child verification rules," the spokesman said.
"We have saved about £48mn per year and blocked over 8,000 cases of attempted fraud."