WITH the federal tax-filing deadline just weeks away, several million American homeowners face a choice they probably never dreamed they had: To deduct, or not to deduct, all the private mortgage insurance premiums they paid last year. It's a choice that could save them substantial tax dollars, but that might also risk a fight with the IRS.

Five million homeowners pay mortgage insurance premiums that often range from $500 to $1,000 or more a year. The insurance is required by mortgage lenders whenever a buyer's down payment is less than 20 percent of the purchase price of the home. Most borrowers pay premiums monthly as an escrow item, along with mortgage interest, property taxes and hazard insurance. Though paid by the borrower, the insurance solely benefits the lender in the event of delinquency or foreclosure.

For homeowners who itemize deductions for federal and state tax purposes, there has been no question traditionally about mortgage insurance premiums: They're not deductible. In fact, the IRS says premiums can't be written off in its Publication 530, "Tax Information for First-Time Homeowners." The IRS classifies mortgage insurance premiums as an expense charged by the lender for "specific services" rendered in connection with obtaining a home loan. Other examples of nondeductible services include ap- praisals a nd document preparation charges.

But some prominent tax lawyers have argued that the IRS has unfairly denied homeowners the right to deduct their mortgage insurance premiums, adding hundreds of millions of dollars yearly onto the cost of homeownership nationwide.

In the words of one lawyer's extensively documented brief against the IRS's position this month, homeowners "should treat [private mortgage insurance premiums] as interest and deduct them, because they are, in fact, interest and therefore are deductible."

Paul J. Housey, a New York tax attorney with Sonnenschein Nath & Rosenthal, argued his case in the March 8 issue of the tax and accounting journal, Tax Notes. Housey says mortgage insurance premiums fit all the key characteristics of interest for income tax purposes: They are "paid solely for the 'use or forbearance of money, '" they vary according to the size and perceived risk of the loan, and they produce no specific "services" to the borrower other than obtaining money from the lender.

And, when marketed as "lender-paid" mortgage insurance with the premium charges rolled into a higher mortgage interest rate charged to the borrower, the premiums not only are paid as interest, but are readily accepted as such by the IRS.

It is time, Housey says, for taxpayers and the IRS to treat mortgage insurance premiums correctly as a form of interest that can be deducted -- now -- on homeowners' income tax returns.

Longtime income tax specialist Herschel Bloom, a partner with the Atlanta law firm of King & Spalding, agrees.

"I would advise any of my clients to deduct [mortgage insurance premiums] as interest," he said. "I think there is solid [legal] authority to do so."

Housey's Tax Notes article cited IRS rulings and tax court decisions to support his case. He also said IRS publications offer conflicting interpretations of the status of private mortgage insurance premiums.

But the IRS itself is adamant on the subject. Spokesman Don Roberts said the agency's position "is that mortgage insurance premiums are not deductible" when paid by the borrower to the lender to obtain a loan.

Ironically, the industry that would most directly benefit by a change in the IRS's position has remained cautiously mum.

"We don't give tax advice to borrowers, we're in the insurance business," said Richard C. Gray, general counsel of United Guaranty Corp., a major mortgage insurer based in Greensboro, N.C.

But privately, insurance executives say that any change in the deductibility of premiums would have huge benefits for homebuyers, Realtors, homebuilders, banks, mortgage companies and local governments and others concerned with housing affordability.

"The only possible opponent of [treating premiums as interest] is the IRS," said one executive, "because they'd lose tax revenues. But what's more important -- fairness to consumers or sending more money to Washington?"

What should you do if you pay mortgage insurance? You could take the aggressive -- though risky -- approach of following Housey's and Bloom's advice and deduct all your premiums for last year. However, assuming that neither Congress clarifies the law nor IRS changes its position, there is a chance you could be challenged on the deduction in the event of an audit.

But Housey and Bloom argue that since "substantial authority" for the deduction exists -- as marshaled in Housey's March 8 article -- taxpayers would not likely face an IRS penalty.

The safer course remains: Don't deduct your premiums.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.