Welfare recipients have been forced to wait years as public servants responsible for Centrelink payments try to unscramble unlawful debts.
Two federal agencies have been warned to speed up their work to fix tens of thousands of miscalculated debt notices.
As many as 100,000 welfare debts were miscalculated by Services Australia and the Department of Social Services between 2003 and 2020, the Commonwealth Ombudsman has found.
The departments' "income apportionment" practices misinterpreted and unlawfully applied the Social Security Act from at least 2003 until December 7, 2020, when the law changed.
This resulted in some Centrelink customers' employment income being assessed in the wrong fortnight and potentially affected a significant number of payments.
Services Australia paused its review of about 20,000 debts while it obtained legal advice and identified about 87,000 other files that might have been affected by the unlawful or incorrect "income apportionment" calculations.
The issue was not related to the controversial robodebt scheme, but rather was a result of agencies holding an incorrect understanding of relevant legislative provisions.
But a report by the ombudsman released on Monday found the two agencies were still unable to advise how many people were affected or how much payments went up or down because of unlawful calculations.
The agencies were also still settling a final legal position about how to lawfully calculate employment income before they recommenced assessing cases.
"Services Australia and DSS did not act promptly to address this issue - in the three years the agencies have known about this issue, we expected more action to have been taken to address it," the report said.
The ombudsman said there was a clear principle that if "agencies make a mistake that impacts people, they should acknowledge it and develop a fair way to address the mistake".
"They should also clearly explain what the mistake was and what they intend to do to fix it. The public deserve no less."
The report made eight recommendations, which the two agencies have accepted.
They included developing a strategy to assess a sample of historic debts, underpayments, Administrative Appeals Tribunal decisions and debts referred to the prosecutor that were potentially affected by unlawful income apportionment, and a way to manage remedies for affected customers.
"Given the scale of income apportionment and the length of time involved ... (an option) might be an approach involving large-scale waiver of debts ... rather than seeking to re-calculate over 100,000 individual debts."
Services Australia noted in its response that in October the Commonwealth prosecutor's office had started notifying people prosecuted over the past five years about the ombudsman's findings.
On November 6 the agency started sending letters to affected customers about the pause on debt recovery.
Greens spokeswoman Janet Rice said the report was damning and showed the need to scrap all debt recovery because of its unacceptable human cost.
"Services Australia has broken the law by chasing people, across two decades, for debts they do not owe, and has then failed to produce any remediation or communication plan in the three years they've been aware of the issue," Senator Rice said.
"It is a complete failure that has left income support recipients in a distressing limbo, unable to live their lives without the shadow of debt hanging over them."
Australian Associated Press