HM Revenue & Customs has promised to fix its computer systems after it was found to have incorrectly taxed up to five million UK citizens.
The report by the National Audit Office (NAO) found that up to £880m in pay as you earn (Paye) taxes had not been collected each year, while other taxpayers had overpaid by up to £340m.
It said that Paye systems were not "well suited" to somebody having more than one job and that its shortcomings were compounded by inconsistent working practices within the department.
HMRC admitted its Paye systems had difficulty coping with people who had more than job and said it would move its processing from its 12 regional databases onto one single national database during 2008-09.
An HMRC spokesman said: "This will bring together separate employments into a single customer record to create a single view of employees' tax affairs.
"Our staff will have access to all of an employee's pay, tax, national insurance and pension information which will be all in one place. This will make our Paye processing quicker and more accurate."
He pointed to the NAO's findings that the HMRC calculates the correct amount of tax in 95 per cent of income tax cases and has improved its processing of income tax returns.
The spokesman said the department was automating and tightening many of its processes and introducing checks on employee starter and leaver information.
The NAO said in its report that IT systems were "not well suited to the efficient administration of income tax where people have more than one job or change jobs on a regular basis".
It added: "These difficulties have been compounded by inconsistent working practices within the department as a consequence of staff not being aware of or failing to follow departmental procedures."
The NAO said problems stemmed from tax records being structured around jobs rather than around taxpayers.