HM Revenue & Customs (HMRC) lost £2.27bn in tax credits last year, according to a report by the National Audit Office (NAO).
Tax officials admitted the majority of this - £1.6bn - was as a result of mistakes rather than fraudulent claims.
In 2009, 9% of tax credits were paid out when they should not have been, and HMRC said it aimed to reduce this to 5% by 2010/11.
But last year's figure was around £850m higher than this target.
It comes despite HMRC's predictions that they would cut the losses by £1.4bn. It now concedes its efforts to reduce the hit saved less than £500m.
The NAO welcomed some "innovative" measures at the department, which are beginning to show results in tackling particular problems.
But it stressed that one in five of all claims, or 1.4 million, were still being overpaid.
The head of the NAO Amyas Morse, who last year highlighted problems with HMRC's accounts because of tax credit fraud and error, described the tax credit system as "complicated".
Although he added: "HMRC has further to go to achieve sustainable reductions in tax credits error and fraud.
"To tackle error and fraud effectively, there needs to be an improved understanding of risks and better use of information."
Labour MP Margaret Hodge, the chair of the Commons Public Accounts Committee, said: "It set itself a target ... which it missed by a mile."
She welcomed some signs of improvement, saying HMRC had "made welcome inroads into tackling some categories" but added it had "made little progress in other areas".
"I find it deeply worrying that even after HMRC has taken action, one in five claims still contain error or fraud," she said.
But Eloise Walker, a partner at Pinsent Masons law firm, said it was important to note that the figures in NAO's report are extrapolated - so could be significantly higher or lower.
"If you look at all the underlying detail, the Revenue are actually making very, very good progress in terms of tackling fraud and errors in these types of claims," she told Sky News.
Tax credits payments are based on estimates of income, and HMRC estimates that up to £4bn of tax credit debt is unlikely ever to be recovered.