Accounting Practices

IOLTA Compliance Guide for Bookkeepers

Bookkeepers' Guide: IOLTA Compliance and Trust Accounting



Interest on Lawyers' Trust Accounts (IOLTA) are special bank accounts that are used to hold client funds. IOLTA accounts are subject to strict compliance and accounting rules, and bookkeepers who handle these accounts must be familiar with the regulations.

IOLTA Compliance Rules

The following are some of the key IOLTA compliance rules that bookkeepers should be aware of:

• Client funds must be kept separate from the law firm's funds. This means that the bookkeeper must create separate ledgers for each client's funds and track all transactions related to those funds. Law firm funds must be kept in a separate operating account. No client funds should ever be used for business expenses. Earned revenue from funds should be paid to the law firm first, before paying business expenses.

• The law firm must provide accounting statements to clients upon request. These statements should show all transactions that have been made in the IOLTA account, as well as the current balance of the account.

• The law firm must maintain complete records of all IOLTA transactions for at least six years. These records should include the date of the transaction, the amount of the transaction, the payee or recipient of the funds, and the purpose of the transaction.

• The law firm must promptly notify clients of any funds that have been received on their behalf. This notification should include the amount of the funds, the date they were received, and the purpose for which they were received.

• The law firm must promptly pay clients or third parties who are entitled to receive funds from the IOLTA account. Any disputes regarding the payment of funds must be resolved promptly.

IOLTA Accounting

IOLTA accounting is a subset of trust accounting. Trust accounting has different rules than traditional business accounting, and bookkeepers who handle IOLTA accounts must be familiar with these rules.

Some of the key differences between trust accounting and traditional business accounting include:

• Trust accounting does not track profit or loss. Instead, it tracks the amount of funds that are held in trust for clients.

• Trust accounting does not track depreciation or amortization. These expenses are not relevant to trust accounting, as the funds in the account are not used for business purposes.

• Trust accounting does not track interest accumulation. The interest earned on IOLTA accounts is typically used to fund legal aid programs.

• Trust accounting does not track tax accounting. The taxes on the funds in the account are the responsibility of the clients.

• Trust accounting does not track account management fees or bank fees. These fees are typically paid by the law firm, not by the clients.

Common Issues with Trust Accounting

There are a number of common issues that can arise with trust accounting. Some of these issues include:

• Lack of trust-specific knowledge and rules. Bookkeepers who are not familiar with the specific rules of trust accounting may make mistakes that could have serious consequences. You should ensure that your bookkeeper knows the specific nuances around trust and IOLTA accounting.

• Size of firm. Smaller firms may not have the resources to implement and maintain a sound trust accounting system.

• Manual systems. Manual systems are more prone to errors than automated systems, and can result in re-reconciling everything starting from the mistake. Even Excel spreadsheets are prone to errors.

• Trust funds getting commingled. This can happen when client funds and operating funds are mixed together.

• Trust fund overdrafts. This can happen when the law firm withdraws more money from the IOLTA account than is actually available. This is a serious offense that can result in disbarment.

• Absence of safeguards. There should be safeguards in place to prevent unauthorized access to the IOLTA account.

• Uncleared funds not addressed. Uncleared funds should be reconciled promptly to ensure that the balance of the IOLTA account is accurate.

• Sloppy bank reconciliations. Bank reconciliations should be performed on a regular basis to ensure that the balance of the IOLTA account is accurate.

• Separate billing and accounting systems. The billing and accounting systems should be integrated to ensure that all transactions are tracked correctly.

• Trust fund balance not visible on all invoices. The trust fund balance should be visible on all invoices so that clients are aware of how much money is being held in trust for them.

• Lack of controls and data protection. There should be controls in place to protect the IOLTA account from unauthorized access and to ensure that the data is accurate and secure.

Required Records for Trust Accounting

The following are some of the required records for trust accounting:

• Bank ledger. This record should show all transactions that have been made in the IOLTA account.

• Receipts journal. This record should show all deposits that have been received into the IOLTA account.

• Disbursements book. This record should show all disbursements (payments and earned revenue) that have been made from the IOLTA account.

• Client ledger balances. This record should show the balance of the IOLTA account for each

Required Reconciliations

In order to comply with IOLTA rules, bookkeepers must reconcile IOLTA accounts on a monthly basis. This reconciliation must be done in a manner called 3-way reconciliation. The rules are simple:

• The balance in the check register must be reconciled with the bank statement.

• The total of the ledger cards must be reconciled with the check register and the bank statements. The total of the ledger cards must be equal to the balance in the IOLTA account.

• Every transaction in the IOLTA must be associated with and listed on a ledger card.

Below are examples of a one way reconciliation, in which the bank statement and the check register account are reconciled. This is not enough for IOLTA compliance.

Insufficient one way reconciliation

A proper IOLTA compliant 3-way reconciliation will contain the check register, bank statement, and individual client ledgers.

Compliant 3-way reconciliation

Note that there is an uncleared check from 2022 in both our examples. It is important that uncleared checks are followed up upon after three months.

While a bookkeeper can reconcile IOLTA accounts monthly, ultimately the attorney tied to the IOLTA account is held responsible for verification. Skilled bookkeepers should ensure that the attorney makes time every month to review the reconciliation.

ERP Recommendations

It’s best to use an Enterprise Resource Planner (ERP) to keep track of your trust accounting. While manual ledgers and Excel are practically free, reconciliations are cumbersome and prone to errors. Due to the strict compliance rules surrounding IOLTA, using an ERP is best practice.

The most common ERP known is Quickbooks. Cheap and easy to use, Quickbooks is perfect for any small business. However, Quickbooks is not built for trust accounting, and expertise and knowledge will be required to use it for trust accounting. Contact us if you would like to see how Quickbooks can work for your trust accounting.

There are legal ERPs specifically made to handle IOLTA and trust accounting. One such software is TABS3.

Interested in learning more about the bookkeeping process for IOLTA accounts? Contact us to see how we can help.


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