The practice of law is tough enough on its own.
Juggling different client issues can be exhausting, but the pressure really ramps up when you’re running a law firm.
If you’re a lawyer thinking about starting your own firm or managing one already, you’ve got to be on top of IOLTA accounting.
It might feel like it’s no big deal to handle, especially for a small firm, but there’s a good chance you’re making a few mistakes without even knowing it.
Let’s break down the three most common ones.
1) Mixing IOLTA Funds With the Firm’s Funds
Mixing client funds with your firm’s operational funds is one of the most serious missteps you can make in IOLTA accounting. This is not a good practice and it may get you big trouble if caught.
At first glance, it might not seem like a big deal because maybe you accidentally deposit a client’s settlement check into your business account or use your IOLTA account to pay a firm expense. But these small lapses can spiral into significant problems, especially if you do it frequently.
The primary issue with mixing funds is that it undermines the trust-based nature of client relationships. Your role as a lawyer is to hold these funds on behalf of your clients, not use it as lunch money so to speak. Clients expect their funds to be held securely and used solely for their intended purpose. When client money gets mixed with firm funds, it becomes nearly impossible to track accurately who owns what. If your accounts are ever audited or investigated, even minor discrepancies can look like intentional misuse, exposing you to professional disciplinary action.
The repercussions can be severe and ethical violations stemming from commingling often result in fines, sanctions, or even disbarment in extreme cases. Financially, it creates a bookkeeping nightmare, making it harder to reconcile accounts and increasing the likelihood of overdrafts, especially if client funds are used unintentionally.
To prevent this, make your IOLTA account a no-go zone for anything unrelated to client transactions. Every deposit and withdrawal should be carefully documented, and under no circumstances should you dip into those funds for firm expenses. By keeping these lines clean, you’re not just protecting your practice—you’re safeguarding the integrity of your relationship with every client you serve.
2) Skipping Account Reconciliation
Reconciliation is the backbone of IOLTA compliance, yet it’s often overlooked or rushed, leaving room for errors that can snowball into serious issues. Reconciliation means comparing your bank statement for the IOLTA account to your internal client ledgers to ensure every penny is accounted for. This isn’t just about balancing the books because it’s more than that. I’s about making sure that the money you’re holding for clients matches exactly what your records say, down to the cent.
If there’s even the smallest discrepancy, like a transaction being recorded late or a math error, it needs to be tracked down and corrected immediately. Ignoring it risks leaving your account out of balance, which could raise red flags during an audit.
For many lawyers, the process can feel tedious or confusing, especially if you’re managing multiple client cases. That’s why hiring a CPA or bookkeeper familiar with IOLTA requirements can be a game-changer. They can handle the heavy lifting, ensure every transaction is properly documented, and flag potential issues before they become major headaches. They can also guide you through tricky situations, like reconciling partial disbursements or handling refunds.
If hiring someone isn’t feasible, legal accounting software is another excellent option. Just make sure it’s designed specifically for law firms, with features that support trust account tracking and compliance. Whether you do it in-house or outsource the work, make reconciliation a top priority and aim for monthly reconciliation at the least. In some cases, weekly reviews can be beneficial, especially during periods with a lot of client activity. Staying on top of this process doesn’t just protect your license. It gives you the peace of mind to focus on serving your clients instead of worrying about financial missteps.
3) Ignoring the Proper Accounting of Interests and Fees
Here’s the deal: the interest your IOLTA account earns isn’t yours, and it doesn’t belong to your clients. It’s directed to state programs that fund legal aid, which means you can’t touch it. At the same time, any fees your bank charges for maintaining the account—like service charges or transaction fees—can’t come out of client funds. If either happens, you’re breaking the rules, plain and simple.
To stay on the right side of compliance, start by working with a bank familiar with IOLTA accounts. They should know the interest is sent directly to the state’s IOLTA program and shouldn’t require you to manage this process yourself. Just confirm it’s happening as it should. As for fees, arrange with your bank to have those charges taken out of your operating account, not the IOLTA. It’s a quick conversation that can save you a world of trouble.
If you’re short on time, a CPA or bookkeeper experienced in trust account management can handle this for you. They’ll ensure everything is in order so you can focus on your clients, not account details.
Get Your IOLTA Accounting in Order
IOLTA accounting demands patience and meticulous attention to detail—two things most busy lawyers don’t have time for.
That’s where Virjee Consulting steps in. Our team of experienced law accountants specializes in IOLTA compliance, taking the stress off your shoulders and ensuring everything is handled correctly.
Let us simplify IOLTA accounting for your law firm. Reach out today, and we’ll help you get everything back on track.
