HMRC said 963,000 taxpayers were placed in the self-assessment (SA) tax system, yet none of them had filed SA tax returns for three years.
Late tax returns are immediately slapped with a charge of £100 if filed after January 31, meaning those affected were chased for late filing penalties averaging £300 each.
In 2015-16 and 2016-17, HMRC raked in £283million from late return fines.
Nicky Morgan MP, chairman of the House of Commons Treasury select committee, said her committee would consider an investigation into why HMRC had tried to fine innocent taxpayers.
She said: “I appreciate HMRC have to deal with millions of taxpayers but they need to focus on those who really are trying to evade the tax system, not those who shouldn’t be filling in forms at all.”
HMRC said those affected, who represent one in 11 of Britain’s 11 million people registered to pay tax this way, have been taken out of the system.
The department said the taxpayers have been “removed from the SA regime and are no longer liable for SA”.
Tax accountants have also called for urgent reforms to the system in which taxpayers are penalised for submitting SA returns late.
George Bull, a senior tax partner at RSM, said: “It’s all very well for HMRC to emphasise that no money has been lost when the penalties were cancelled.
“This completely ignores the fact that the penalties should not have been issued in the first place.”
Frank Askew, head of tax in the Institute of Charted Accountants in England and Wales, said the issue “would suggest that there are systemic problems with the taxpayer records that needed to be addressed, for example whether those returns were actually due”.
He added: “It is right that penalties should be levied on those who do not pay their taxes, but the system needs to be flexible and proportionate and not applied where penalties are not appropriate.”
An HMRC spokesman said: “We’ve removed 200,000 people from self assessment who are now paid through PAYE but might have forgotten to inform us.”
SA returns are required to be filed by individuals who are self-employed and do not pay tax through the pay as you earn system.
Those who are correctly registered for SA could also avoid late return penalties if they have a good reason.
Anthony Thomas, chairman of the Low Incomes Tax Reform Group (LITRG), said in January: “We are anxious that people may feel somewhat panicked by penalty notices from HMRC and just pay financial sanctions for filing Self-Assessment forms late without considering that there may be a perfectly good reason for the delay in filing that may make them eligible for special treatment.”
“LITRG is reminding taxpayers that there could be extenuating circumstances where someone may be able to avoid a penalty by claiming what HMRC define as a ‘reasonable excuse’ for filing their tax return late.
“These could include flooding or severe weather problems, but also life events such as serious illness or bereavement, and other causes beyond the taxpayer’s control.”