In their report the MPs also recommended police are given the resources to employ dedicated identity fraud officers.
'Young at risk'
They said tougher sanctions should be placed on organisations that put people's personal information in danger.
Immediate action should be taken by the banking industry to protect customers, the MPs said.
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ID FRAUD WARNING SIGNS
You have a good credit history but are turned down because of a default on your record
There are entries on your credit file you do not recognise
You are being chased for outstanding debt
Mail you normally expect from financial institutions does not arrive
You have lost or had important documents stolen
You apply for benefits and are told you are already claiming, when you are not
Source: Home Office
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The group was set up in 2006 and asked to undertake a study into the area of identity fraud.
The crime costs the economy about £1.7bn a year, according to government estimates, with 171,488 cases coming to light in the UK during 2006.
Recent surveys suggest as many as one in four people may have been affected by identity theft.
The MPs found many people were not taking adequate steps to protect themselves against the fraud, particularly young people.
Research shows one in six 16 to 25-year-olds publishes information about his or herself on the internet that could be used by an identity fraudster.
The MPs called for an advertising campaign on social networking websites such as Facebook, Bebo and MySpace to raise awareness among younger people.
Nigel Evans, chair of the group, said: "Throughout the course of this study the group has been stunned by the damage identity fraud is having on the lives of our constituents across the country.
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A third of people throw out sensitive material without so much as tearing it in half
Nigel Evans,
All Party Group on Identity Fraud
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"Identity fraudsters have had it too easy for too long. It's time we cracked down on them before more people's lives are ruined by their trade."
Clive Green, from London, had his identity stolen and £3,000 was withdrawn from his account.
He told BBC Radio 4's Today programme: "It suddenly became an absolute nightmare for me.
"Mortgage wasn't paid, cheques bounced, charges for this, bank charges for the overdraft, and all these things just started adding up.
"I'm still trying to claim this back."
1% investigated
Mr Evans told BBC Radio 4's Today programme: "A third of people throw out sensitive material without so much as tearing it in half, and there is such a thing as bin raiding... 22 of 36 police forces in England don't have ID fraud in their local policing plan."
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HAVE YOUR SAY
I've been a victim of ID fraud and it isn't pleasant experience. They obtained my details via a corrupt retailer
Shipa, Birmingham
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Estimates by Cifas, the UK's fraud protection body, suggest only 1% of all cases of ID thefts are investigated by police.
Sandra Quinn, of the Association for Payment Clearing Services, said she was unsure if an ID fraud tsar was the answer.
She said: "What we are really looking for is all industries working together and that has to be the solution to the problem."
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Criminals often steal identities in order to do more serious organised crime
Meg Hillier,
Home Office minister
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A spokesman for the British Banker's Association, said the industry had established a cross-industry working group to set up best practice guidelines after it recognised the problem five years ago.
The Home Office said it had introduced a number of measures to target identity fraud, including tougher criminal penalties, better co-ordination in prosecuting fraudsters, more powers to share data about frauds and increased efforts to raise public awareness of the issue.
National Identity Fraud Prevention Week begins on Monday.
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