"I was panicking, I didn't know what to do," said Trisha Costello, who faced a £160 fine after her daughter had gone for a check-up at the dentist.
This was one of 1.7 million fines over dental treatment or prescription charges in England since 2014 that were overturned when challenged, a National Audit Office investigation says.
These were people wrongly accused of fraudulently claiming free treatment.
An NHS spokeswoman accepted there could be "confusion" over eligibility rules.
The British Dental Association said there was "no excuse" for so many "innocent people" to face such threats.
The National Audit Office has examined concerns about people being wrongly fined over claiming free treatment, particularly involving visits to the dentist, when they really were eligible.
The public spending watchdog, examining penalty notices since 2014, found 30% of the fines levied were subsequently withdrawn, representing £188m in fines that had been wrongly issued.
Dentists have warned it is often vulnerable people, such as those with learning difficulties and disabilities, those on low incomes or carers bringing relatives with dementia, who get caught in the fining system.
"This is not a system that is working as it should," said Meg Hillier, who chairs the Public Accounts Committee.
"The NHS must take urgent steps if it is to avoid causing unnecessary distress to patients, tripped up by an overly complex system, who end up facing large penalty charges."
Charlotte Waite, of the British Dental Association, said: "England has a system built on a presumption of guilt, which offers few signposts, and has left vulnerable patients chased by debt collection agencies."
The BDA has warned that many people facing the threat of fines will pay up rather than contest them, even though they are eligible for free care.
It said many of the wrong fines were the result of simple errors or confusions when filling in forms.
The dentists' organisation said fear of fines had - with visits from low-income patients falling by almost a quarter.
'They really scared me'
"We were being accused of fraud. When I called the number on the letter and explained the situation they just said, 'No, no - you owe this money. Get out your credit card,'" says Trisha Costello.
The north London family faced a £160 fine after teenage daughter Rachel had gone for a dental check-up.
Rachel has significant learning difficulties and was in full-time education - and was exempt from paying for her treatment.
But her father, who brought her to the dentist, ticked a wrong box in the form about eligibility.
Without any further checks, they were given a fine.
Being wrongly branded a cheat was deeply upsetting, Trisha says. "They really scared me. I was upset, fuming, I felt threatened.
"It's grossly unfair to people who can ill afford it. It tends to be people who are struggling."
The family were helped by a local carers' organisation, which intervened, showed the evidence of eligibility and got the penalty charge overturned.
But Trisha worries "some people would feel bullied" into paying.
The National Audit Office also raises the question of how much of the money in the fining system comes back to the NHS.
An analysis of 2018-19 showed about £199m of fines had been issued - but only £33m had so far been paid, with £46m for people who were exempt but mistakenly fined, £18m cancelled and £101m unpaid.
There were also administration costs - accounting for 31% of the money recovered.
The outsourcing company Capita was used for some of the fining and debt collection for dental treatments.
The National Audit Office said Capita keeps 100% of the fines and surcharges - with the NHS receiving the value of the treatment.
If fines are not paid, another company in the Capita group is used as a debt collector, keeping almost half of the money recovered. The contract is due to finish in December.
"All policies and procedures that we follow are those of the NHS at every stage," said a Capita spokeswoman.
The fining system is intended to deter fraud - with about 47% of dental treatments and 89% of prescription items going to people who should be exempt.
And the report shows the scale of the problem of fraud in the NHS, with total annual losses from "corruption, fraud, bribery" of £1.27bn.
Brendan Brown of the NHS Business Services Authority, said the rules about entitlement to treatment could be "complicated to understand and we recognise that genuine mistakes and confusion happen".
"We strongly believe in educating patients and ultimately removing error, so we can efficiently tackle deliberate fraud," said Mr Brown.
"We acknowledge that understanding eligibility can be even more difficult for vulnerable people and so we have invested a lot of time and effort into creating extra support."