The Treasury inspector general for tax administration also said the IRS did not agree with its recommendations that it set up a process to test the software used in the Free File Program.

"Management stated testing of commercial tax preparation software to determine its accuracy in applying the tax law would be a monumental challenge for the IRS," it said.

That stance drew quick criticism from Sens. Max Baucus, D-Mont., and Charles Grassley, R-Iowa, the chairman and top Republican on the Senate Finance Committee.

"If the IRS really doesn't have the authority to require its Free File partners to get the software right, then they've got a bad agreement with these companies that doesn't protect taxpayers as it should," Baucus said.

Free File is a partnership between 19 tax software companies and the IRS that provides free software to taxpayers who have an adjusted gross income of $52,000 or less.

The tax agency says 95 million out of 136 million taxpayers qualify for the program, but it has not attracted many users so far, with about 3 percent of individual taxpayers using it in 2006.

The Treasury inspector general said an audit found several problems: One-fourth of the software programs would not allow taxpayers to take either the earned income tax credit or the child and dependent care credit without also taking the dependency exemption. And software for 45 percent of the members did not have adequate interview questions to determine if the taxpayer could take the dependency exemption.