[broiler]

Jesse

My first suggestion to you is to treat your income as honestly as possible. Your situation is made more difficult by your lack of records for the first part of the year. You truly become a professional when you treat your situation like a business.

To answer your questions:
1)Filing as a pro would make your life easier if you were to get audited. Since a pro is allowed to net wins and losses, there would be no change from the auditor. The problem is that you actually are part year hobby and part year pro. Some IRS auditors would give you some leeway for honesty, others would not and it really depends on who you get. The downside is 15.3% self employment tax on professional winnings.

2)The SEP would not be a problem since you will have a business (Schedule C) that will be used as your income base. The SEP really is that simple. There is a one page form filed with the IRS to notify them that a plan was formed and the % of income that you will contribute to the plan. All you have to watch is the maximum contribution % and the contribution $ maximum for the year ($41,000 for 2004). I would guess that the number will be 42k for next year. There is a real simple formula to calculate your contribution for any year. A SEP has no annual filing requirements, so it really is a cheap way to set up a retirement plan.

3)The estimated tax question is difficult because most answers deal with avoiding underpayment penalties. If you want to owe zero with your tax return for 2005, then that is a different situation. Avoiding penalties is easiest to manage using the prior year exceptions. The SE tax is 15.3% up to the FICA limit and then 2.9% past that number. I believe the FICA limit is between 91k an 93k for 2005. I apologize for not having the exact number since I am at home and the IRS website freezes my home computer 95% of the time. To take care of the income tax, I would just get a copy of the 2005 tax tables, annualize the income on a quarterly basis, and pay in the % of tax for the number of quarters you have passed in the year. You might owe a little at the end of the year, but it shouldn't be a large amount if you are close on your estimations.

4)Your records are the best proof you have against the IRS. The IRS must disproove your records before they can use any of their methods to determine your income. The greater the detail, the harded it is to lose in court. A 3 of 5 year test only matters if you will be unable to pass the test. You don't have to wait 2 years to pass and then start filing as a professional. If you never have a losing year, there will never be a question that you are a pro player.

I hope this was able to clarify some of your questions.