The Commonwealth Ombudsman is set to investigate Centrelink's debt recovery system.
There has been widespread criticism the new automated data matching system which uses information from the tax office has been producing incorrect debt notices.
The federal government is trying to claw back $4 billion in over payments from welfare recipients.
The ombudsman has agreed to independent MP Andrew Wilkie's request for an investigation which he had lodged before Christmas - a move backed by Senator Nick Xenophon.
"This is a victory for common sense," he said.
Deputy ombudsman, Richard Glenn that the matter was "of significant interest to this office".
“I can certainly say the ombudsman has approved an own-motion investigation into the matter... this one will be self-initiated because we have a number of complaints and there is significant public controversy about the issue. So it is an inquiry into the issue at large, rather than into a specific complaint," Mr Glenn said.
“Certainly there’s enough information from complaints we’ve received and … that it’s an issue of significant interest to this office, and we’ll be pursuing it.”
The investigation will reportedly focus on three areas: the data-matching process used to compare Centrelink records with those of the tax departments; how Centrelink communicated with clients and how the agency managed the fallout.
Mr Glenn says that while the investigation process may take a long time, his agency has the resources to carry out the task.
Those affected by Centrelink's demand letters have been sharing their stories on the website.
