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The Boston Globe

Business

Likely tax cheats concentrated in South, West, data show

WASHINGTON — Worried the Internal Revenue Service might target you for an audit? You probably should be if you own a small business in one of the wealthy suburbs of Los Angeles.

You might also be wary if you’re a small-business owner in one of dozens of communities near San Francisco, Houston, Atlanta, or the District of Columbia.

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A new study by the National Taxpayer Advocate used confidential IRS data to show large clusters of potential tax cheats in these five metropolitan areas. The IRS uses the ­information to target taxpayers for audits.

The taxpayer advocate, Nina Olsen, runs an independent office within the IRS.

She got access to the data as part of an effort to learn more about why some taxpayers are more likely to cheat than others.

The study also looked at tax compliance in different industries, and found that people who own construction companies or real estate rental firms may be more likely to fudge their taxes than business owners in other fields.

The list of about 350 communities nationwide identified by the study included only one from Massachusetts, in Mattapan.

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Many of the communities are very wealthy, including Beverly Hills and Newport Beach in California.

Others are more middle class, such as New Carrollton, Md., a Washington suburb, and College Park, Ga., home to a section of Atlanta’s massive airport.

The study focused on small-business owners — sole proprietorships, to be specific — because they have more ­opportunity than the typical individual to cheat on their taxes.

Many small businesses deal in cash while most individuals get paid in wages that are reported to the IRS.

The IRS only audits about 1 percent of tax returns each year, so the agency tries to pick returns that are most likely to yield additional tax money. The IRS will not say much about how agents choose their targets.

But as millions of procrastinators scramble to meet Monday’s deadline to file their taxes, the agency is running every return through a confidential computer program to determine the chances of collecting more money from an audit.

Each return is assigned a score. The higher your score, the more likely you are to get audited because, according to the IRS, the more likely you are cheating on your taxes.

The score is called the Discriminant Inventory Function. A high score does not guarantee you are a tax cheat but the IRS says it’s reliable.

‘‘If your return is selected because of a high score under the DIF system, the potential is high that an examination of your return will result in a change to your income tax liability,’’ says an IRS publication that explains the auditing process.

How do you get a high score? The IRS won’t say, but veteran tax preparers and former IRS workers believe they have a pretty good idea.

‘‘If you’re reporting $8,000 of charitable contributions when you’re only making $50,000, that’s a red flag,’’ said Bob Meighan, vice president of TurboTax, an online tax preparation service. ‘‘Likewise, if you’re reporting business or employee expenses that are out of the ordinary for your income range, that would attract the interest of the IRS as well.’’

The bottom line, according to the experts: People who take unusually large deductions for their income get a high score.

The researchers also looked for areas with high concentrations of small business owners who were very unlikely to cheat on their taxes.

They came up with four: the Aleutian Islands in Alaska; West Somerville, Mass., Portersville, Ind., an unincorporated town in the southern part of the state; and Mott Haven, a neighborhood in the Bronx, one of New York City’s boroughs.

Stephen Mackey, chief executive of the Somerville Chamber of Commerce, said he was at a loss to explain why the neighborhood stood out.

‘‘I’d like to think we’re not alone in terms of the civic engagement of business people,’’ Mackey said.

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