What should I do about small cracks when painting a homes exterior?
The most common cause of cracked paint is moisture. If removing the paint takes wood with it, that suggests water may have gotten into the siding through the cracks and weakened the wood.

Lightly tap the siding with a hammer where the cracks appear. It should not leave a noticeable impression; if it does the clapboard is rotting and should be replaced. You can check how much moisture is in the siding by blowing a hair dryer on it for a minute or two at close range. If there is excess moisture in the wood, the heated spot will get darker as water is pulled out, then lighter again as it dries from the surface. As long as the wood isn't softened though, a little moisture is okay.

In any case, you should definitely sand those cracks before painting over them. Use 400-600 grit sandpaper to smooth it out but don't sand all the way through the paint. Also, use primer before your color coat if switching from oil to latex or vice-versa. If you don't know which the old paint is, it's always best to prime anyway.

Source: friend who is a painting contractor.