Her Majesty's Revenue and Customs new tax evasion hotline has been flooded with calls making malicious and unfounded allegations, MPs have been told.
One woman made 68 calls to report her husband - none of which had led to an investigation, the House of Commons Public Accounts Committee was told.
Dave Hartnett, acting chairman of HMRC, said he was 'disappointed by the quality' of calls to the line aimed at catching income tax cheats.
But he said figures for the current year had shown an improvement.
Mr Hartnett told the committee there were up to two million people in the 'hidden economy' in the UK - about 80% of whom were 'small time' tax evaders in low paid jobs such as hairdressing, gardening or cleaning.
But there were also examples of higher earning offenders, including medical consultants and 57 barristers who were 'in the hidden economy at some time not paying any tax'.
The all-party group was told 28,000 people were investigated each year - but Mr Hartnett denied claims by chairman Edward Leigh that the chance of being caught were 'virtually nil'.
He said: 'we are getting better and better at catching people' but conceded that only two cases per thousand were successfully prosecuted.
Mr Hartnett said: 'It is a low number and we do have plans to increase it.'
He said there had been 2,000 completed investigations from 120,000 calls to the tax evasion hotline.
The hotline was launched in 2006 with television and radio adverts. It is aimed at catching income tax, corporation tax, capital gains tax, VAT, National Insurance and inheritance tax cheats and was modelled on the Department for Work and Pensions benefit cheat hotline.
Its website promises anonymity for informers and says: 'With your help, we'll make sure people who are not registered for tax have nowhere to hide.'
But according to a National Audit Office report it was the least cost-effective detection method, with the yield being only twice the cost of operating it, the committee was told.
Mr Hartnett said: 'We get an awful lot of information on the hotline and it's important for us to risk assess it properly, not to trouble people where there is no reason to trouble them.'
He added that part of the problem was people 'snitching' on their 'next door neighbours' without having any concrete evidence adding: 'I am not sure whether snitching is a particular English disease or not but there are undoubtedly callers to our evasion hotline who think that by simply calling the line whatever they say, accurate or inaccurate, they can cause pain to somebody.
'I think it would be fair for us to say we have been a bit disappointed by the quality of some of the calls, which has made it hard for us to justify starting an investigation.'
Mr Hartnett also gave the MPs an insight into some of the techniques used by investigators.
He said new areas were constantly being discovered where self-employed and small business people were evading income tax - using the example of nail bars to illustrate his point: 'Nail bars are part of the fashion trade and we are finding it is quite astonishing. Quite a lot of them aren't known to us and we have nail bar investigations involving over a million pound in tax.'
He said HMRC investigators used 'data matching' techniques but also scanned the Yellow Pages for new nail bars rather than waiting for local tax inspectors to report them.
Inspectors also went after high value tax evaders by keeping an eye on individuals who were buying expensive cars or boats.
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