Government departments and agencies are costing the taxpayer huge sums each year by making incorrect decisions which are then overturned by tribunals, an official report has concluded.

A significant part of the problem, the chairman of the tribunal service watchdog warned, was that officials increasingly did not bother to attend tribunal proceedings.

In 2000/01, about 40% of cases had an official presence; by 2009 it had dropped to 16%.

Public bodies that make repeated mistakes over welfare benefits, immigration cases, education allocations and tax decisions should be penalised for their errors and made to pay the full legal cost of the resultant hearings, Richard Thomas of the Administrative Justice and Tribunals Council said.

In the report, Right First Time, he said there was a crucial gulf in knowledge because departments no longer knew why things had gone wrong.

"Public bodies must improve the quality of their decision-making by aiming for a 'right first time' culture and avoiding the expense and stress of appeals from aggrieved citizens."

It was now the exception for officials to even attend tribunal hearings, the report noted, adding: "There are currently few initiatives to improve the quality of decisions and there is little learning from appeals."

Thomas added: "Every day public bodies at central and local level make tens of thousands of decisions about individuals.

"Unfortunately, evidence suggests that far too many of these decisions are incorrect – regularly up to a third of appeals made to tribunals are upheld.

"The number of appeals and challenges against decisions which people bring to tribunals and ombudsmen has risen sharply – it's now more than 1m a year ... If original decision-makers fail to get their decisions right first time, then a strong case can be made for holding them responsible for paying the full cost of subsequent proceedings where their decisions are overturned – the 'polluter pays' principle.

"We are calling on the lord chancellor to work with the Cabinet Office to find ways to ensure that the costs of poor decision-making are borne by the department or public body concerned."

A few agencies have made an effort to improve, the report notes. The Midlands and East region of the UK Border Agency and the Criminal Injuries Compensation Authority are singled out for praise.

The high rate of success on appeals is evidence of mistakes. In 2009-2010, 38% of appeals made to the social security and child support tribunal were upheld, while 27% of appeals against the UK Border Agency were sustained. There was a 63% success rate for appellants at traffic penalty tribunals.

• This article was updated on 14 June at 17.00 to clarify a reference to the tribunals service