Centrelink has now wiped, reduced or written off 70,000 “robodebts”, new figures show, as the government’s automated welfare debt recovery scheme faces a landmark court challenge.

Victoria Legal Aid on Wednesday announced a challenge to the way Centrelink evaluates whether a person owes a welfare debt under the $3.7bn system. It will argue the “crude calculations” created using tax office information are insufficient to assess a person’s earnings and, therefore, are unlawful.

“The way robodebt averages people’s income assumes that they work neat, regular hours throughout a year,” said Rowan McRae, the executive of Civil Justice Access and Equity at Victoria Legal Aid.

“In reality, we know people work part time or sporadically throughout the year, because they’re studying, can’t get regular work, have multiple jobs or are unwell. This means the calculation of alleged ‘overpayments’ is often inaccurate.”

The challenge comes as new figures show the Department of Human Services has now raised 409,572 debts from October 2018 back to July 2016, when the scheme began.

Letter recipients are asked to provide information to prove they do not owe the debt, triggering a reassessment process.

The department could not say how many reassessments were underway, but did reveal there had been 29,888 debts reduced, 14,621 wiped to zero, and 26,104 “waived or written off permanently”. That represents 17% – or about one in six – of the total debts raised so far.

The average debt was $2,184, according to figures provided to Greens senator Rachel Siewert during the Senate Estimates process.

Siewert, who chaired a Senate inquiry that called for the scheme to be suspended, said on Wednesday that the government’s attempts to fix the scheme through tweaks “around the edges” were insufficient.

“We should not be subjecting people on income support to a system which has such a huge rate of error,” she said.

“It just wouldn’t fly in any other industry but the government thinks they can get away with it because in many cases people on income support just don’t have the means to question their debt notices.”

Ed Husic, Labor’s shadow minister for human services, said the legal challenge showed “how shabbily conceived and managed this system was”.

“It caused stress and angst to thousands of Australians and now it is creating even more headaches for the government – and yet no one seems to have been held accountable for this.”

The court challenge was also welcomed by the Australian Council of Social Service chief executive Cassandra Goldie, who said the scheme was a “devastating abuse of government power”.

Guardian Australia first reported in late 2016 the growing concerns about the Coalition government’s automated compliance system, which replaced manual checks by staff and led to an explosion in the number of “compliance interventions”.

Since then, the government has stood by the regime, despite sustained criticism from the social services sector and legal experts.

Late last year Victoria’s recently retired chief crown prosecutor, Gavin Silbert SC, described the scheme as an “elaborate sham”. Silbert also indicated a desire to challenge the system in the courts.

According to a federal court filing to be heard within weeks, Victoria Legal Aid will represent Madeleine Masterton, a Melbourne nurse with whom Centrelink has raised a $4,000 alleged debt.

Masterton, who was studying and receving youth allowance during the period the alleged debt was incurred, said she was given “no information about how my debt was calculated”.

“If my case proves the whole robodebt system is wrong under the law, then I hope that the system is wiped and that everyone else who has a debt is freed from it until a better system is in place that calculates transparently and correctly,” she said.

McRae said legal aid could not accept “a system that is so clearly not working, that has been proven to be causing overwhelming hardship”.

Since the scheme was introduced, people have reported receiving letters indicating that Centrelink believes they owe a sum of money, often tens of thousands of dollars, as a result of an “overpayment”. The letters do not provide evidence of how the debt has been calculated and places the onus of proof on the recipient.

Centrelink claims the initial letters do not represent “debt notices”. But if recipients cannot prove the debt is incorrect, it is assumed the debt exists, Legal Aid said. Private debt collectors are also engaged to collect the money Centrelink believes is owed.

Late last year, in response to scathing criticism from a former administrative appeals tribunal official, a department spokesman, Hank Jongen, argued that the system was fair and included safeguards to to ensure debt decisions were correct.

The Department of Human Services was contacted for comment.