In online communities where either multi-byte encodings cannot be used, or where the general populace does not use a Chinese character input system, pinyin is often used as a way of communicating in Mandarin.
This is especially common in chat systems such as IRC or ICQ; however, it is only used sparingly and hardly ever will you find a long conversation taking place purely in pinyin.
The reasons for this are two-fold. Firstly, most people do not know how to accent characters, and thus are unable to write proper pinyin, where the "vowels" should have their tones indicated (see above writeup).
Of course, some people solve this problem by adding a number at the end of each word to indicate the tone. For example, bao4 is "bao" in the fourth tone, which means "hug", while bao3 is in the third tone, which means "full". Reading an entire paragraph of text written in this way is not easy, however.
This leads to the next point. Pinyin is extremely difficult to read in large portions, because it is essentially meant more as a pronounciation guide (kind of like phonetics) than an actual way of writing. In Mandarin, there are quite a few words which sound exactly the same but have different meanings. In written form, this causes no confusion because each character looks different. In spoken form, it can be derived from the context.
But for some reason, when written in pinyin, it is hard to determine the context of the word. The reader will often need to read out the pinyin and hear it being spoken before he/she can understand it. This is more time-consuming as it requires an extra machine cycle to render the word in audial format before interpreting it. sorry, bad joke
This may be more common for native speakers of Mandarin than foreigners, however, mainly because in Mandarin, each tone is very distinct. A person who has been speaking Mandarin for a long time will tend to pronounce a word in a certain way (and pitch) all the time, so the process of first constructing a sound through a set of phonetical characters and then varying the tone feels strange and unnatural. This is also why native speakers find the way foreigners speak in Mandarin quite funny; in languages like English the tone is allowed to vary, but in Mandarin that makes for a very peculiar-sounding pronounciation.