The difficulty most traders have in proving the existence of a valid trading business is their failure to treat their trading activities like a business. In order to withstand IRS scrutiny in the event of an audit it is important to be able to demonstrate that it has been operated like a business. By maintaining a system of logs and journals you will be able to prove the legitimacy of your trading business. The end result is that in the event of an audit you will have written proof of the existence of your business while the IRS will have no written proof of its nonexistence.
The trader's mantra for this proof is "documentation, documentation, documentation!" By putting a statement at the bottom of your logs (as illustrated in the samples) dating and signing them on a monthly or quarterly basis, you will create courtroom evidence of valid business deductions and activity. Additionally, by having the logs and forms notarized you will bulletproof your case and provide unequivocal proof that you did not sit up the night before the audit with 8 different colored pens creating the documentation.
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FLOOR PLAN AND BUSINESS AREA OF YOUR HOME
BUSINESS INCOME SUMMARIES
BUSINESS EXPENSE SUMMARIES
HOME OFFICE LOG
EQUIPMENT OFFICE LOG
STOCK TRANSACTIONS
ASSET PURCHASES LOG
BUSINESS MILEAGE LOG
MONTHLY INCOME LOG
RESIDENTIAL IMPROVEMENTS LOG
TRAVEL MEALS ENTERTAINMENT LOG
ALIMONY & SUPPORT PAYMENTS LOG
IRA & KEOGH PLAN CONTRIBUTIONS
ENTERTAINING AT HOME GUEST LOG
ENTERTAINING AT HOME EXPENSE LOG
TRADING LOG DIARY