This remains a confusing topic...
Short answer:
For most natural lakes and minimally controlled reservoirs, choose IRESCO = 2, make your entire year a "flood" season, and set all 12 monthly target volumes (STARG values) to the principal volume (the volume in the reservoir when just at the outlet threshold). Make the emergency volume substantially larger than this -- I think I've used 1.5 to 2x the principal volume. You may have an actual emergency volume if you've got good specifications for your reservoir. This gives the reservoir some "room" to allow gradual drawdown, which occurs only between normal and emergency volumes. All volume above emergency gets spilled that same day. And, start with NDTARGR = 3 or so. I've used 2, and up to 10, but 3 seems to be pretty common in my watersheds. Drawdown occurs as a geometric series of (1/NDTARGR)^days. Even though some of my reservoirs have been "controlled," I still have the best results with IRESCO=2.
Longer answer:
For the same reasons that Charles gives, I've never used options 1 or 3. Option 0 aims to have a fairly regular outflow (perhaps as might be wished for power generation, or milling?), except that all water above the emergency volume spills that day.
I've only used option 2, which seems to work best for more-or-less natural lakes and reservoirs. The mind-set here is apparently for reservoirs that are used for water supply, and so they target to keep as much water in storage as possible (up to emergency volumes), EXCEPT during flood-prone seasons, when the water is lowered to allow for some "bounce" and storage in the reservoir to mitigate runoff peaks. For only the "flood" months, SWAT assumes a "target volume" (not release rate), and calculates outflow based on how much above the target volume the simulated volume is for that day. There is a formula that estimates soil moisture, with wet soils being more prone to cause floods and so the reservoir target volume is lowered to provide more storage for safety. Somewhere I suppose reservoirs may be operated in this way (perhaps in the more arid west), but not in my watersheds. I just subvert the soil-moisture formula by specifying monthly target volumes, which take priority.
It would be an improvement and simplification in SWAT to just allow the user to chose the principal volume as the target volume as one of the options -- I would make that the default, with a default NDTARGR=3. It might help to allow the user to input a stage-discharge curve instead of specifying NDTARGR, but the NDTARGR method actually seems to work pretty well (although I think it should be a real number, rather than an integer). And I think Ponds and Wetlands ought to have the same simplification (with target volume = normal volume, not dependent on soil moisture, since these small features are not commonly manipulated for water supply).
More than you asked for -- and when you learn more, let us know!
Cheers,
-- Jim