If you handle a law firm, you are familiar with the legal requirement for running bank accounts. Unlike other businesses, private practice law firms must bank clients’ funds in a separate account.
That’s because you’ll handle money from settlement checks, overpayment of bills, escrow funds, or advance payments for court. Separating the accounts makes it easier to track usage and any interest accumulated—which you should hand over to the client.
If the cash will only be in your possession for a short period or it’s a small sum, you must store it in the Interest on Lawyers’ Trust Accounts (IOLTA) program. Knowing the ins and outs of managing an IOLTA account is crucial to staying on the law’s good side.
Best Tips for Running IOLTA Accounting
- Unless the client states otherwise, you must deposit the funds in an IOLTA-approved financial institution in the same State you operate in.
- Unless the financial institution waives fees, you must pay all fees for maintaining the account. You cannot charge maintenance fees from the client’s funds.
- Although some States permit non-lawyers as signatories to clients’ accounts, the buck stops with you. Train and ensure signatories follow-best practices.
- Request for replenishment the instant client trust funds balance is low, don’t wait to send a retainer replenishment invoice at the end of the month. If possible, use automated billing features to request direct electronic deposits into the trust account.
- Avoid expenses and advance payments made by credit card. The credit card provider may charge back the sums, which means you’ll fail to protect the client’s funds.
- Keep accurate records of all transactions in the account, no matter how small. It would be best to keep a ledger for each client, following double-entry accounting rules. Reconcile the bank account statements at least once a month.
- Constantly monitor work in progress for costs and fees.
- Always ensure business funds and client funds are kept separate.
- Deposit incoming checks immediately. Do not wait to deposit checks as this may lead to cash-flow problems for your law business.
- Move all earned fees out of the IOLTA account immediately. In IOLTA accounting, it is illegal to use the account as a savings account.
- IOLTA accounts are ideal for small amounts of money kept over a short time. For a more considerable sum retained for an extended period, open a trust account that will earn interest.
Common Mistakes to Avoid When Accounting an IOLTA Bank Account
When you run accounting for an IOLTA bank account, the following mistakes can mess up your taxes, or worse, get you disbarred:
1. Borrowing from an IOLTA account
Don’t withdraw money from an IOLTA account before earning that money first. Doing so will get you disbarred in addition to facing stiff penalties.
2. Not keeping business and client accounts separate
You must transfer the money to a business account first before using it for your gain. Additionally, never use an IOLTA account as a savings or operating account.
3. Recording a trust deposit as income
It may be tempting to record a trust deposit as an income in IOLTA accounting, but funds deposited into a client’s account belong to your client, not you. Recording trust deposits as an income may be simpler for accounting’s sake, but that can mess up your taxes and land you in trouble with regulators.
Final Word
IOLTA accounting can seem like picking your way through a minefield, but some simple tips may help you clear the uncertainties.
If you follow pointers such as keeping clients and business funds separate in IOLTA-approved institutions, recording all transactions in books of accounts, using cash after moving it to your account, and avoiding credit card payments, you will do just fine.
