Up to £3.5bn from the government's furlough scheme could have been paid out in error or due to fraudulent claims, HM Revenue and Customs has said.
HMRC permanent secretary Jim Harra told MPs on Monday that 27,000 "high-risk" cases were being pursued amid fears that 5-10% of applications could have been claimed fradulently or in error.
Official figures show as much as £35.4bn has been paid out through the government's job retention scheme since it was established in April.
The scheme paid 80% of furloughed workers' wages in the first months of lockdown with around 1.2 million employers making the use of the system by August.
As many as 2.7 million self-employed people also used the scheme during the pandemic, claiming a further £7.8bn in funding from the Treasury.
Speaking to the Public Accounts Committee on Monday, Harra said the tax authority would not pursue employers who had made claims in error and would instead focus on tackling fraudulent activities.
"We have made an assumption for the purposes of our planning that the error and fraud rate in this scheme could be between 5% and 10%," Harra said.
"That will range from deliberate fraud through to error.
"What we have said in our risk assessment is we are not going to set out to find employers who have made legitimate mistakes in compiling their claims, because this is obviously something new that everybody had to get to grips with in a very difficult time."
He added: "Although we will expect employers to check their claims and repay any excess amount... what we will be focusing on is tackling abuse and fraud."
The HMRC chief executive also revealed that 8,000 calls had been made to HMRC's fraud telephone hotline in regards to the scheme.
And he encouraged workers who believed their employers were making fraudulent claims to report them to his department.
He added: "While we can't get involved in any relationship between the employee and employer, we can certainly reclaim any grant that the employer is not entitled to, which includes grants they have not passed on in wages to their employees."
The job retention scheme is set to wind down from next month, with chancellor Rishi Sunak repeatedly dismissing calls from opposition MPs to extend the support further.
Former Conservative Party leader Iain Duncan Smith said the figures proved it was the right time to bring the scheme to a close.
"It's rapidly being defrauded more and more because employers are making furloughed people work and telling them they can't say anythign or they'll lose their jobs," he told the Daily Mail.
"The scheme is open to fraud and abuse and it's hard to check where the money is actually going.
"The sooner we bring this scheme to an end, the sooner we can stop haemorrhaging money and get the country back to work."
John Johnston is a reporter for CSW's sister title PoliticsHome, where this story first appeared.