Almost a million taxpayer records were accidently deleted from Inland Revenue computer systems between 1997 and 2000 due to a software problem which went unnoticed for several years.
The Department took three years to discover that software used to cleanse its database of old cases was also wiping live ones from its system.
This resulted in some 364,000 people who cannot be identified being owed £82m, while another 22,000 did not pay tax due of around £6m.
The Revenue admitted the problem last year but the full scale of the error has now only just emerged, following a report from the House of Commons' Public Accounts Committee on 8 September.
A routine housekeeping procedure on the PAYE database, which had been in place for at least 10 years, failed to distinguish between old and live cases, says the report.
The error was revealed when a new management information system was brought in to monitor the software. The Revenue has since introduced a backup system.
The MPs used the incident to reinforce their concerns about the Department's ability to manage the IT underpinning the tax system.
Their attention focused on the serious IT problems which contributed to the troubled launch of the tax credits scheme in 2003 – described by Committee Chair Edward Leigh as a "nightmare" – and left many vulnerable people in financial difficulty.
Leigh commented: "There is a general lesson here: that an ambitious scheme might be fatally undermined by its intrinsic complexity."
During the course of the Committee's inquiry, the Department – now known as HM Revenue & Customs - it had learned the lessons from its previous IT problems.
It is said to be in the midst of a dispute with EDS, the tax credit system IT provider, over compensation "for unsatisfactory system performance". The case has gone to independent arbitration but, says the report, EDS has not accepted the findings, leaving the Department to "consider its legal options".
The contract with its new IT provider, Gapgemini, has imposed a more severe penalty regime for underperformance. The PAC noted that "such clauses inevitability affected the 'price' of the contract."
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