REHAB boss Angela Kerins told the Department of Justice it had no right to dictate how the charity spent lottery scheme funding it received from the Government.
In a letter released by the Dail's spending watchdog, the PAC, Ms Kerins said it was "not appropriate" for the department to seek to influence how the money was put to use.
She was responding to concerns expressed in a 2012 departmental audit that some of the funding from the Charity Lottery Compensation Fund appeared to have been spent on administration rather than charitable activities.
Spending money from the fund on administration is not allowed, according to the department.
The fund was set up to compensate charity lotteries for loss of earnings after the setting up of the National Lottery.
In return for the payment, charity lotteries have to cap their prize fund at €20,000 a week – a situation they argue makes them uncompetitive.
Rehab has received over €32m from the fund since 2007.
But despite the large sums of public money received by Rehab from the fund, Ms Kerins said the department did not have the right to insist how this was spent.
She argued that rather than being a state grant, the fund was a commercial agreement between the Government, the National Lottery and the owners of private charity lotteries.
"It is not an Exchequer grant to organisations to provide services. It is therefore clearly not appropriate for the Department of Justice to seek to influence the operations of a private body by insisting that its earned income be applied to certain areas," Ms Kerins wrote in the letter to the department's head of internal audit, Walter Johnston.
In the letter she also claimed the audit demonstrated "serious and fundamental misunderstanding" of how the fund worked.
The existence of the audit was first disclosed in the Dail a fortnight ago by Justice Minister Alan Shatter when he revealed it found almost €4m in Rehab scratch card sales had netted a surplus of just €10,000 in 2010.
Mr Shatter plans to phase out the fund by 2016, a move which has been challenged in the courts by Rehab.
The audit report stated: "It is the internal audit's opinion that some of the costs outlined . . . are administrative costs and are not in line with the condition that the grant 'cannot be used for administrative purposes'." It recommended that there needed to be greater clarity on administrative spending and called for the funding to be clearly identifiable in Rehab's accounts.
A spokesman for Rehab said Ms Kerins had sought a meeting with the department so points raised in the audit could be responded to in further detail. However, no meeting was arranged by the department.
The letter emerged as the PAC gears up to question the charity on its use of state funding, which includes around €50m a year from the HSE.