The Northern Ireland Affairs Committee has called on the UK Government to abolish British naturalisation fees for Irish citizens, branding the charges "indefensible".
MPs on the committee said in a report that they believe the Home Office fails to understand and reflect the historical nuances of the issue when it treats Irish citizens as people from any other third country when applying to become British citizens.
The committee examined the compatibility of UK nationality rules with the Good Friday Agreement, following the high-profile court case between the Government and Northern Ireland resident Emma DeSouza.
Ms DeSouza challenged the Government's position that she was a British citizen through automatic conferral as she always identified as Irish-only and held a passport accordingly.
During their investigation, MPs heard evidence from DUP peer Lord Hay, who was born in the Republic but is a long-term resident in Northern Ireland.
He holds an Irish passport but, when he applied for a UK passport, he had to apply for British citizenship. He said he was invited for an interview to prove his nationality, but was not prepared to do so.
He said the process for citizenship could cost around #1,300 and that would put off many people born in the Republic of Ireland who wanted a UK passport.
The Northern Ireland Affairs Committee said naturalisation is a lengthy process, costing £1,330. Applicants must also take a Life In The UK test, costing an extra £50, and attend a mandatory citizenship ceremony.
Its report also urges the Government to drop the requirement for Irish citizens to sit the test, and to make attendance at the ceremony optional.
Chairman of the Northern Ireland Affairs Committee Simon Hoare said: "Respect for, and acceptance of, people's identities in Northern Ireland is a cornerstone of the Belfast/Good Friday Agreement.
"It's clear that the current approach towards citizenship issues from the Home Office has failed to consider the history, personal ties and movement of people between the two countries.
"As a consequence, the Government's universal approach to citizenship leaves some feeling unable to assert properly and simply their identity as either Irish or British or both."
He added: "It is absurd and unfair that people born in the Republic of Ireland, but who have lived for decades in Northern Ireland or the rest of the UK, and feel themselves to be British, have to pay to obtain British citizenship.
"These people are not covered by the Belfast/Good Friday Agreement's birthright provisions, so they have to take the naturalisation route.
However, the policy is out of step with what the public needs, and with life on the island of Ireland today. Frankly, the fee must be scrapped.
"Even amongst those who are covered by the Agreement, there remain inconsistencies in the approaches taken by the co-guarantors in London and Dublin, principally on what the terms 'to identify' and 'be accepted as' actually mean in practice.
"A joint UK-Irish approach on this front will help smooth inconsistencies and prevent further grievances. This task needs facing into sooner rather than later."