I failed to report rental income for the last 6 months of 2007. I honestly did not know (I know, not an excuse) that friends informally renting rooms in my house counted as "rental income." They share half the mortgage and utility expenses. If I amend the return to reflect this income (about $5,000), will I get flagged for an audit?

I would say that you should amend your tax return, and I really don't think that you would be flagged for an audit! In fact, if you do not amend the tax return and were you to be selected for an audit, and the IRS agent found out that you had received Rental Income and you failed to report this, then you could be faced with some potential adverse penalties.

I would recommend that you go to a CPA who will file the amended tax return and he would allow you to take all the legally allowable deductions that you are entitled and this would reduce your potential tax liabilities.

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That's what I figured, but the whole audit flag thing worried me--the internet is a great source of information, or can make you even more nervous, depending on what you read! This is very reassuring. I'm planning to visit a CPA (which I have never done before) to prepare my 2008 return and amend 2007 return. Thank you so much for your answer!