A quarter of Canberra welfare recipients caught up in the government's controversial "robo-debt" program owed no money or had their debt reduced, according to peak social services body ACTCOSS.
But the Department of Human Services has denied the letters it sent asked for debt payments and says it was trying to confirm or update employment details.
As data on the number of ACT households contacted by Centrelink emerges, ACTCOSS made a damning submission to an inquiry into the program, saying it had hit vulnerable people.
Of 2,591 debt recovery cases Centrelink opened from July to January, 473 people were found owing no payment, while debt amounts were reduced for a further 195.
The government has charged 1,007 Canberrans the 10 per cent debt recovery charge, and 70 have entered a payment arrangement with debt collectors.
ACTCOSS director Susan Helyar said the figures, obtained through a Senate question on notice from ACT Labor senator Katy Gallagher, revealed a high error rate for a government program "that has caused profound distress and human suffering".
"Imagine the backlash that would confront a Canberra bank, business or health fund if they churned out digitised debt letters to their customers and 25 per cent of them turned out not to owe the debt or to owe a different amount of debt?," she said.
"It would be simply unacceptable and we would all be holding it up as an epic failure of administration. We should be holding government to a much higher standard. These numbers make it clear that this program is a standout administrative failure and should be scrapped."
DHS spokesman Hank Jongen said the agency issued none of the letters in error.
"What the system does is generate a letter that advises people who have received social welfare payments that the department has received information from the ATO about their earnings which is different to what the recipient had previously advised the department," he said.
"This letter simply asks people to confirm or update their employment earning details. This is not a debt letter, it is seeking people to clarify information as required and we encourage people to respond to this request."
However while initial letters ask people to update their details, Centrelink sends a debt notice when it receives no reply.
ACTCOSS says receiving the letters from Centrelink created anxiety that there is a debt or issue that needed to be resolved.
It told a Senate inquiry that after welfare recipients approached Canberra legal and financial counselling services about their notices, all disputed cases were resolved in the clients' favour.
Senator Gallagher said the "robo-debt" system had been a disaster and Centrelink had let down Canberrans.