The Inland Revenue must do more to tackle tax fraud, parliament's spending watchdog has warned.

A report by the National Audit Office released on Friday found the Inland Revenue faces real threats of fraud and needs "a clear view of the resources and approaches" to tackle them.

The watchdog called on its inspectors to step up the number of prosecutions and make greater use of the new offence of evading income tax.

The report also said the taxman should mount more publicity campaigns to change public attitudes to fraud and heighten the fear of detection.

Every year just over 60 people are prosecuted for fraud, with a 75 per cent conviction rate.

The NAO highlighted new the case of people selling their pension funds unaware that they are liable to pay tax, saying it was vital that new types of fraud are identified and acted on promptly.

It also highlighted for concern the abuse of offshore financial institutions by taxpayers to minimise their liabilities. One case alone is estimated to have cost the Treasury £90 million.

The head of the National Audit Office, Sir John Bourn, said: "It is important that the Inland Revenue have a clear view of the risks and scale of external fraud and the resources and approaches they are going to use to tackle them, for even a small percentage loss to fraud could amount to billions of pounds.

"The use of offshore accounts and structures to commit tax fraud is a particular concern. While acknowledging the challenges faced by the Revenue in tackling fraud, and the many useful initiatives and techniques they are developing and implementing to tackle the problem, my report identifies good practices and opportunities for reducing fraud further."

The Inland Revenue hit back, saying it was making progress.

"The Revenue will continue to hit cheats in the pocket and to prosecute when appropriate. We have continued to develop our ability to detect and deter dishonesty," said a spokesman.

"It is well acknowledged by academics and other fiscal authorities that measurement of the hidden economy is difficult. This is also true of tax authorities in other countries but the Inland Revenue is making progress in measuring the risks of tax fraud as the NAO report acknowledges."

Matthew Taylor, the Liberal Democrat Treasury spokesman, released new figures showing nobody has yet been prosecuted for income tax fraud and only 23 cases are working towards prosecution.

"It is hardly surprising that there is a problem with income tax fraud when so far nobody has been successfully prosecuted and only 23 cases are on their way to court. We all end up paying when people successfully avoid tax," he said.