Documentation is key. I went thru an audit this year with a client in the gambling business. Most of his transactions were in cash and records were not kept for obvious reasons. He is an honest guy – the only kind of client I accept. He reported all of his income. The IRS accepted his income number and only gave him 25% of his expenses, even for those for which he had proof – like his checks to me for preparing his taxes.
On appeal, they showed previous tax cases that had been ruled in their favor and said “take us to court”. Going to tax court is not cheap and with the likely outcome not being much better, my client was forced to take their offer. Had he been able to document his cash outlays, he would probably received a different result as these records were asked for and not delivered. We might have been able to settle his case more favorably without going to the appeal level.
Bottom line. Document your expenses as you incur them and keep good records.