The royal commission into robodebt is seeking to understand the role of the Commonwealth Ombudsman, whose 2017 report identified a number of flaws in the scheme but stopped short of declaring the "income averaging" debt calculation process unlawful.
Former senior assistant Ombudsman Louise Macleod said during an investigation of the human services department, her team had uncovered concerns with how averaging was being used.
But she had been unable to convince her superior - acting Ombudsman Richard Glenn - to include these concerns in a final report.
"We flagged concerns with what (the department) were doing, basically from the outset ... but ultimately it didn't make it into the (final) report," Ms Macleod said.
Ms Macleod was shown multiple documents, including emails from 2014 flagging legal problems with income averaging, that she had never seen before.
Had this legal advice had been provided to her office, Ms Macleod said the Ombudsman would have publicly called for the scheme to cease.
Ms Macleod was also presented with documents showing income averaging was not being used as a "last resort" to raise debts, as claimed by the department.
Instead internal emails, not provided to the ombudsman, showed 76 per cent of debts had been based on averaging a person's earnings.
"I find it upsetting ... we were told by DHS that they didn't have that information," she said, becoming emotional.
Ms Macleod said she "felt like a failure" because she hadn't been able to convince her superiors that there were problems with the scheme.
Earlier, the commission heard all departments investigated by the Ombudsman were expected to be forthcoming with relevant information and it was an offence not to provide it.
The Ombudsman's report was widely used by the former coalition government to defend the scheme continuing.
Ms Macleod said in hindsight the report should have been more direct about the limitations of the robodebt scheme.
She said former minister Alan Tudge had "cherry picked" aspects of the report to defend the scheme in media releases and "spin".
The Ombudsman's investigation was triggered by a dramatic rise in complaints from people who had received Centrelink debt notices.
While social security complaints made up two-thirds of the total received by the Ombudsman, Ms Macleod said they almost doubled between October and December 2016 after the scheme came into force.
"Increases in complaints are always a red flag for the Ombudsman's office," she said.
The Ombudsman's investigation into the scheme flagged problems with internal review mechanisms used by the human services department when they received a complaint about a debt.
Ms Macleod said it appeared the department was "circumventing proper administrative process" which meant complainants would not have the option to appeal their matter.
"Beyond that, you're also talking about a cohort of people accessing the welfare system (who) don't have the means to take it to the Administrative Appeals Tribunal or to the Federal Court," she said.
"So we were concerned about that."
More than $750 million from 380,000 people was unlawfully recovered through the program and the automated debt notices have been blamed for contributing to multiple suicides.
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