Welfare officials have defended using the public to root out suspected benefit cheats despite figures showing the vast bulk of tip-offs have proved unfounded.
More than 1.6 million cases were opened by the Department for Work and Pensions between 2010 and 2015 as a result of tip-offs submitted online and via a hotline, the Observer said.
But 85% of the more than one million cases closed in that period threw up insufficient or no evidence, a request for data under the Freedom of Information Act established.
Liberal Democrat leader Tim Farron told the newspaper the "alarming" proportion "shows the system has failed".
He added: "It should be the DWP which investigates benefit fraud, not your closest neighbours.
"This McCarthy-style reporting of benefit fraud is another example of the Government's desire to turn people against the welfare state and to treat sick and disabled people as second-class citizens."
But the DWP said public information plays a valuable role, saving the taxpayer around £180 million last year.
"Calls to the fraud hotline are vital - we take benefit fraud very seriously so whenever we receive an allegation we investigate and, if necessary, prosecute and recover overpaid benefits," a spokesman said.