Taxpayers and businesses spend 7.6 billion hours every year to file their tax returns. That’s the equivalent of 3.8 million people working full time for a year. And that doesn’t even count time spent responding to Internal Revenue Service notices and audits. A simpler U.S. tax code probably isn’t in the cards, but with some planning and perseverance — whether you’re racing to the finish this year or already starting to plan for April 15, 2010 — you can still reduce the time needed to prepare your return.

Tax returns are all about numbers. Lots of numbers. Some come from banks and brokerages; others are on receipts, invoices and other pieces of paper you receive throughout the year.
   
If you chuck those papers in shoe boxes, tax time can be a nightmare. With a simple filing method, however, you can organize paperwork as you get it and have more time to decipher the IRS’s instructions when you need it.

Create a Folder System

Setting up a system takes only a couple of minutes. To identify the categories, pull out last year’s return. You can probably create one folder for all income documents, including a W-2 from your employer listing your salary and 1099 forms for other income such as taxable interest, ordinary dividends, government payments, Social Security benefits and so on. This folder should also include the year-end reports from brokerages that show capital gains and losses.
   
Deduction categories can include so many receipts and other papers that it’s best to create one folder for each: medical expenses, taxes paid, interest paid, charitable donations, job expenses, investment expenses and so forth. If you switched jobs, keep track of your expenses for finding the new job and moving because of it. Another folder would house your 1098 form, which reports any mortgage interest you paid.
   
Keep the folders together in your filing cabinet. As you get receipts or paperwork, put them in the appropriate folder. This takes only a few minutes if you file at least once a week. If you wait months or the entire year, sorting papers into your new system might take several hours.

Make a Document Checklist

To get even more organized, create a list of the documents you’ve received and those that are outstanding. Write the names of each bank, brokerage, agency and employer in your life. Below each name write the documents it sends. Your bank, for example, will send a 1099-INT. Your mortgage lender sends a 1098. Federal and state governments send 1099-Gs. Brokerages might send 1099-INTs and 1099-DIVs.
   
Keep your list with your folders. As you receive a document and file it, check it off this list. When everything is checked off, you have what you need to complete your return.
   
Then grab your folders and add up the numbers in each. Figure out where the totals go on your tax forms and schedules, and you’re all set. If you have questions, go the IRS website or call 800/829-1040 (businesses call 800/829-4933).
   
After you file, take all the papers and store them in a manilla envelope labeled 2008 Tax Documentation. Put the empty folders back in your filing cabinet for the next tax year. For more organizational and general tax-preparation ideas, read “Getting Organized for the Tax Year” at Bankrate.com.

Dealing With Canceled Debt

If you went through a foreclosure or a real estate short sale, your lender cancels all or some of your debt. Sadly, the IRS considers that canceled debt income, which is like going from the frying pan into the fire. The IRS receives 1099-C forms, which report canceled debt, from lenders. It then matches those records against returns for the corresponding taxpayers to be sure the income was reported.
   
Canceled debt might be excluded from income if you meet certain conditions. To obtain this exclusion, you must file Form 982. But note that this form is so complex, says the Taxpayer Advocate Service of the IRS, it stymies many professional tax preparers.

Link of the Month

If you’re concerned about your bank’s health, or just want access to basic bank-related resources, check out the Federal Deposit Insurance Corporation’s website. In the Quick Links by User section, click on Consumers & Communities to get information about such topics as identity theft, deposit insurance and financial education.
   
On that page’s Deposit Insurance section, choose Insuring Your Deposits to learn what the FDIC covers and what the dollar limits are. The FDIC mails written notices to each depositor of a failed bank. If that bank is acquired by another bank, the acquiring firm also notifies depositors.
   
To find out more about what the FDIC does when a bank goes under, go back to the Deposit Insurance section and click on When a Bank Fails — Facts for Depositors, Creditors and Borrowers. You can learn, for instance, when you can expect the money for your insured deposits and what happens to a loan you have with the bank. The When a Bank Fails link leads to a list of all banks that have closed since October 2000; select More Information About Bank Closings.
   
And to search for a specific bank to find out information such as whether it’s insured or still open, return to the Consumers & Communities Quick Links page, then go to Top Picks on the left side and click on Bank Find.

Websites of Interest

Internal Revenue Service
 
“Getting Organized for the Tax Year”

Taxpayer Advocate Service
 
Federal Deposit Insurance Corporation