The Passport Office is to be made directly accountable to ministers following a summer of chaos that saw outstanding applications soar past half a million.
Home Secretary Theresa May announced the move following two reviews, as well as demands made by the influential Home Affairs Select Committee to strip the Passport Office of its agency status.
HM Passport Office (HMPO) will cease to be an executive agency from October 1 and current chief executive Paul Pugh has effectively been sacked, remaining in the role until a successor - in the form of a Director General - is appointed.
The Home Secretary said: "On June 12, I informed the House that I had asked the permanent secretary to conduct a review to consider whether HMPO's agency status should be removed.
"I have considered the review and relevant Cabinet Office guidance and decided that it should be brought into the Home Office and report directly to ministers.
"As the events of the summer showed, it is essential that HMPO is run as efficiently as possible and is as accountable as possible.
"I also know that its hard-working staff are committed to delivering a high-quality service to the public.
"I believe these changes will put them in a stronger position to do so."
HMPO was accused of putting holidaymakers' summer plans in jeopardy as it struggled to cope with demand and a backlog of applications in progress spiralled to 550,000.
Ministers said the number of outstanding applications has now fallen to around 80,000.
After the severity of the delays emerged, applicants booked to travel within seven days, whose applications had been with the Passport Office for longer than three weeks, were offered a free upgrade to the fast-track service.
The Home Affairs Select Committee has called for all applicants who paid for the fast-track upgrade, prior to the contingency measures being introduced, to be compensated.
A normal passport application costs £72.50, while the fast-track service costs £103.
The Passport Office was established as an executive agency of the Home Office on May 13 last year.
A similar move was made for the former UK Border Agency, which was abolished and brought back into the Home Office under control of ministers.
Home Affairs Select Committee chair Keith Vaz said: "I am delighted that the Government has accepted the recommendations of the Home Affairs Select Committee that the HMPO should lose its executive agency status and report directly to ministers.
"The passport crisis, which consumed the UK over the summer, disrupting travel for over half a million people, was handled appallingly by senior management. I hope that the new director general will provide the HMPO with the fresh start that it needs.
"This change must ensure that the British people never again experience such a terrible service from this critically-important institution."
David Hanson, shadow minister for immigration, said: "This back of the envelope re-organisation is too little too late for the thousands of families who suffered this summer in a passport crisis caused by the complacency and incompetence of Theresa May and David Cameron.
"Belatedly bringing the agency back into the Home Office raises the question about their ability to manage this crisis even now.
"Ministers decided to close overseas offices and sack staff, ministers refused to listen to warnings from the public and from unions, ministers buried their head in the sand until Labour forced them to deal with this issue.
"Bringing the Passport Office back to the Home Office won't solve the problem that this government continues to get it wrong at every turn.
"This is an agency that made a surplus of £124 million in the past two years, so there are important questions to answer on how this transfer will happen, how much it will cost, whether compensation will be paid to families who had to cancel their holidays or pay for a fast track passport, and what assurances will be given to those needing passport services during the transition."
A Labour source said: "Announcing this minutes before the start of a debate on military action in Iraq raises the suspicion that the Home office are attempting to 'bury bad news' which is I am afraid typical of Theresa May's Home Office."
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