[broiler]

I believe that a good faith effort will keep you away from the big penalties because the documentation that you give as an example isn't going to get you to a number far from that of the IRS. If you are documenting reasonable sessions, then you would only be looking at a small audit change, if any.

Documentation is the key to avoiding the large penalties because the IRS would have to prove that your records are incomplete or incorrect. If you have no records, then the courts have allowed the IRS to use any "reasonable method" to determine the correct tax liability. My understanding of "reasonable method" (from a sports betting former client that was unaware of bank reporting of transactions) is that the IRS finds the worst person in the same business and extrapolates their numbers onto your return. The IRS has access to every return, so they will find that guy that grinds out at .25BB/100 and has no business expenses. Incomplete documentation will always get you in trouble under audit and is the biggest money maker for the IRS in my opinion.