![]() ![]() Let’s say that one day you discover a small shortfall in your IOLTA account, and you can’t account for how it got there. Recording them as anything but that could land you in hot water with regulators and mess up your taxes. The funds deposited in your client’s accounts don’t belong to you-in fact, they are funds you owe your clients. Some firms find it tempting to record a trust deposit as income in their accounting software, for simplicity’s sake. To prevent misappropriating funds from other clients, remember to only charge your clients for fees directly relating to their trust account. If your merchant isn’t IOLTA-friendly, however, these fees can become hard to track, causing you to charge the wrong client’s account. Some IOLTA-friendly merchants (like LawPay) will charge fees to your firm’s operating account while depositing funds to the IOLTA account. ![]() If you’ve made the switch from paper cheques to electronic billing (e-transfer, credit card payments, that kind of thing), you can’t pass along the payment fees to your client’s IOLTA. Regardless of which state you’re in, you can’t, under any circumstances, use an IOLTA account as a savings account or an operating account, even if the money you withdraw from the IOLTA has already been earned. Some firms will also intentionally use their IOLTA accounts to hide assets, or will leave funds in their IOLTA even after they’ve been earned, using it as a “savings” account. (Note: if your bank issues a debit card for your IOLTA account, under no circumstances should it have ATM privileges.) You’d need to move those funds into a business account first. You can’t, for example, pay for your firm’s operating expenses directly out of an IOLTA account. Trust funds need to be sacred-for the client’s account only. Failing to keep your client and business accounts separate Whatever the reason, borrowing from an IOLTA account carries stiff penalties, and is one of the most common ways to get disbarred. This is sometimes referred to as “borrowing,” and attorneys do it for many reasons: because they have short-term cash flow problems due to unexpected expenses, or simply because they’ve told themselves they’ll replace the funds right away. Lawyers may not under any circumstances withdraw fees from an IOLTA account before earning those fees. Learn more about how Bench can help you today.įive common mistakes that lawyers make with IOLTA 1. ![]() Your books will be ready for tax season and you can work confidently knowing your IOLTA is handled right. They can also flag any potential misuse of trust funds so that they can be fixed before you face any penalties. How Bench can helpĪn expert bookkeeper ensures your IOLTA is always recorded properly on the books. If these entries are recorded correctly, all credits and debits should cancel each other out, like the above example. That means your firm can withdraw $400 from Doris’ IOLTA account and transfer it into your firm’s business account.Īfter invoicing Doris for $400 and giving her a chance to review the fee (fees should only be removed from an IOLTA account after client approval), Doris’ ledger would now look like this:ĭoris’ account ledger, after invoicing her for $400 Account Let’s say on that same day, your firm completes four hours of work on Doris’ file, at a rate of $100/hr. Here’s what Doris’ individual ledger would look like after the transaction we mentioned above.ĭoris’ account ledger, after depositing a $5,000 retainer check Account No matter which accounting solution you use, you should keep a separate ledger for each individual client account, even if it’s small or for a short period of time. Regardless of how your law firm does its accounting, the system that you use to keep track of an IOLTA account must conform to the principles of double-entry accounting. Doris sends you a $5,000 check to cover your retainer fee, which you deposit into Doris’ client trust account. Let’s imagine that your law firm has agreed to provide legal services to Doris, a local orthodontist, representing her in a lawsuit. (For example, state Supreme Courts have made IOLTA mandatory in some states and voluntary in others.) That’s why it’s important to consult your State Bar Association and a professional accountant before finalizing your accounting setup for IOLTA. ![]() While each IOLTA program follows similar guidelines, rules do vary by state. Every state has an IOLTA program, and it’s likely that the financial institution where you opened your regular business checking account also offers IOLTA accounts. ![]()
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