Industry leader Intuit says it simply won't comply with an IRS directive to identify by electronic code free e-filers who use its TurboTax software.

And TaxBrain, which last year offered free e-filing to taxpayers older than 50, will withdraw from the IRS program.

''Taxpayers should not have their records flagged and segregated simply because they choose to use the IRS Free File program,'' said Leroy Petz, whose company publishes the TaxBrain software.

The IRS insists it is seeking routine information that will help it expand electronic filing. Petz and others in the tax software industry view it as unnecessary government intrusion that could lead to selective tax enforcement.

The disagreement threatens to impede the IRS' effort to wean taxpayers from cumbersome paper tax returns.

The IRS last year launched Free File as a groundbreaking effort by government and software companies to deliver free preparation and e-filing to millions of taxpayers.

Under the program, 17 companies provided free preparation and e-filing. Free offers were made on the basis of age, income, residency and the like. In return, the IRS has agreed not to offer taxpayers its own free alternative.

Terry Lutes, IRS e-filing chief, said Thursday that he is ''flabbergasted'' by privacy arguments against what he views as routine information gathering.

The IRS already knows the type of software used on an electronic return and its route through cyberspace.

Lutes said the electronic flag is essential to judging the effectiveness of the Free File program, which launches its second season this month.

Lutes said the information is also important to the IRS for the marketing of electronic filing, which costs the government less than paper.

H&R Block Vice President Mark Ciaramitaro says his firm will stick with the IRS Free File program. But, he says, he shares the misgivings of others in the tax software business.

Although abuse of the information is unlikely, Internet users as a group are sensitive to privacy issues, particularly those involving tax collectors.

''The perception is the reality,'' Ciaramitaro said of the privacy sensitivities of Internet users.

Despite heavy promotion by the IRS and the tax software industry, only about 40% of returns come to the IRS electronically.

The agency is working under a congressional mandate to achieve 80% e-filing in 2007.

Last year, 2.8 million taxpayers used the Free File program.