Members of the public tipped off authorities about suspected benefit cheats 1.6 million times between 2010 and 2015, new figures reveal.
Over one-and-a-half million cases were opened by the Department for Work and Pensions during that period as a result of tip-offs submitted online and via a hotline.
But 85% of more than a million cases closed in that time frame threw up insufficient or no evidence.
The findings were published in the Observer following a request for data under the Freedom of Information Act.
Liberal Democrat leader Tim Farron told the Observer the "alarming" proportion indicates that the "system has failed."
He said: "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."
The DWP maintains public information plays a valuable role, saving the taxpayer around £180 million a year.