The tax credits renewal process has been a "catastrophic failure" which caused unnecessary hardship and distress to people, a damning Commons report has found.
The Public Accounts Committee (PAC) insisted the Government must learn from its mistakes ahead of renewals in 2017 as the 2016 problems were "entirely predictable".
The report found that neither Her Majesty's Revenue and Customs (HMRC), nor the private contractor it hired to check for errors and fraud, Concentrix, will fully shoulder the blame for mismanaging the process in 2015/16.
"Neither HMRC nor Concentrix are prepared to take full responsibility for the catastrophic failure of this contract," it said.
"What is beyond doubt, however, is that between them they provided a totally inadequate service to claimants.
"Many claimants were confused by the communications they received and were unable to get answers from Concentrix to their letters or calls.
"Despite claimants facing these problems, during the 2016 renewals process, HMRC chose to suspend 45,000 awards.
"This caused unnecessary hardship and distress and HMRC later reinstated some 30,000 awards to which people had been entitled.
"HMRC lacked the commercial capability to design the contract effectively, agreeing to nearly triple the commission paid to Concentrix even though the service was so poor."
Despite expectations the contract would deliver savings of £1 billion, in total £193 million was brought-in by it, the inquiry found.
PAC chairwoman Meg Hillier said: "The dreadful human consequences of this contract are well documented but the story does not end with its termination.
"Having taken the work contracted to Concentrix in-house, it is critical that HMRC now delivers for tax credit claimants.
"HMRC is undergoing significant change and, as our committee has previously documented, in recent years experienced a disastrous decline in its own customer service.
"It must also put right the damage done.
"That means fully reinstating the awards of all claimants who wrongly lost their tax credits and ensuring they are properly compensated for any impact on their entitlement to other benefits.
"HMRC was woefully ill-equipped to design this contract.
"Clearly it placed too little importance on customer service.
"But it was also driven by an inappropriate payment-by-results model, was renegotiated on terms less favourable to the taxpayer, and ultimately achieved less than a fifth of the savings expected.
"This lack of commercial expertise in a critical decision-making function of Government is sadly familiar to our committee.
"HMRC does not plan to involve the private sector in this area of work again but it must demonstrate it has the capability to prevent a similarly dismal performance in any future contracts."
HMRC and Concentrix "consistently failed to provide an acceptable standard of service to claimants" the report found.
PAC said Concentrix was "overwhelmed" by the number of claimants trying to get in touch to find out what had happened to their awards, and in August 2016 it answered just 35% of calls within five minutes despite a target of 90%.
An HMRC spokesperson said: "HMRC is absolutely committed to paying tax credits claimants all the money to which they are entitled, efficiently and on time and we have apologised for the failings that occurred during the contract.
"HMRC terminated the contract with Concentrix when it became clear that it was not delivering the quality of service we expect for our customers. Those who had their payments stopped incorrectly are now back in payment.
"It is important to make checks on tax credits claims to ensure the right people are receiving the money to which they are entitled under the law, and this work will now be done by HMRC. HMRC will not be entering into external contracts for this work in future."