The Motley Fool has a nice blog post on issues involved in electronic filing of tax returns. There are a couple of important points to be made here. First of all...

The IRS has all your information and it will be in digital format (accessible by computer);
You are exposed to some points of vulnerability when filing electronically, rather than on paper;
The information on your PC is vulnerable to theft (whether you send it electronically or just use tax software);
Your information is vulnerable on the Internet-accessible servers to which you upload your data; but
On the flip side of the coin, paper returns are subject to loss, theft and mishandling as well, both in transit and within the IRS.

It is somewhat similar to using a credit card. You can risk online theft when conducting an e-commerce transaction, or real-world theft when handing over your card to a minimum wage worker over a store counter. Risks exist both ways.

At this time I think the jury is out on which is safer, but, for the record, I file electronically.