In a statement of claim filed this week in Regina, the government says a 2014 audit report shows the Merchant Law Group claimed tens of millions of dollars in work time entries that were "intentionally inflated, duplicated or simply fabricated."
The suit alleges that some individual lawyers billed for more than 24 hours of work in a single day.
Entries were also backdated, some by years, it says.
"The government is taking legal action to recover public money that was paid to this firm as a result of serious misrepresentations," Andrew Gowing with the federal Justice Department said in an email Friday.
The allegations have not been proven in court.
The Regina-based law group said in a statement that the allegations have no "basis in reality" and the government is trying to avoid paying its bill.
"This week's latest attempt by the federal government is just more legal jousting," said Donald Outerbridge, the firm's executive director.
He said the firm's work defending the rights of residential school survivors "created significant and lasting animosity" with Ottawa, which has force the lawyers to fight for their fees through the courts for the last seven years.
The Merchant group was one of several firms that was to receive legal fees after a $5-billion settlement in 2005 between Ottawa and residential school survivors.
Believed to be the largest class-action settlement in Canadian history, the settlement was meant to resolve claims of physical and sexual abuse by students at more than 130 residential schools across the country.
The firm said it had dozens of lawyers working on the case for about a decade.
It originally claimed $80 million in fees and the courts ordered the government to pay $25 million until the cost could be verified.
The firm also filed a lawsuit this week that demands the government pay what it owes. That statement of claim, which has also not been proven in court, says verification shows the firm should get $15 million on top of the $25 million it previously received.
The government says in its lawsuit that it reluctantly paid the $25 million in 2008 and now wants it all back "on account of the wrongful and reprehensible conduct" of the firm.
"Canada would not have agreed to those terms had it known the truth."
— By Chris Purdy in Edmonton.
Note to readers: This story has been clarified. An earlier version attributed the firm's response to Tony Merchant.
ALSO ON HUFFPOST: