IOLTA revenue has become a major source of funding for civil legal services in the United States. It is also, however, an unpredictable revenue stream because IOLTA income is entirely dependent on the current interest rate environment and economic conditions. While it may seem simple on paper, the reality is that maintaining a compliant and ethical IOLTA account can be incredibly complex and time consuming, especially without the proper tech stack. The strict state-specific rules and accounting intricacies can be a malpractice trip wire for the most experienced lawyers.

• This gets even more complex as more law firms modernize by offering digital payments for their clients, since even small payment processing fees have to be handled correctly to stay IOLTA compliant.
• Additionally, all data in our software is encrypted by military-grade 256-bit SSL encryption, bank-level security, and all data on our servers is backed up every few hours, so data is protected even in the case of a power outage or other natural disaster.
• Law firms have to follow very strict rules concerning how client funds are handled, where the money is kept, and when it can be used.
• Any law practice that is in the practice of collecting retainer fees from clients may be wondering if there are certain rules and regulations around how to manage those funds until the time a client’s services are rendered.

However, most of the time lawyers usually handle client funds that are too small in amount or held too briefly to earn interest for their clients. In that case, they must participate in the Interest on Lawyers’ Trust Accounts (IOLTA) program. The interest generated from these accounts is remitted to the state IOLTA program for charitable purposes.

Tips for Handling IOLTA Accounts

Whatever the reason, borrowing from an IOLTA account carries stiff penalties, and is one of the most common ways to get disbarred.

Holding clients’ funds in trust is a requirement of the rules of professional conduct. Specifically, Rule of Professional Conduct 1.15 provides for the safekeeping of property that belongs to clients or third persons. Sometimes, https://accounting-services.net/best-online-bookkeeping-services-2023/ the amount of an individual client is large and holds for a long time, so an attorney can deposit the funds into an individual bank account, known as a Client Trust Account with the interest earned belonging to the client.

Important IOLTA Account Rules Every Law Firm Must Know

A client’s retainer should never be mixed with a law firm’s operating account until a service has been billed for and it’s clear that the legal services provided are now due compensation. When it comes to accounting for law firms, there’s no one “right” method (though you may be required to take on the accrual method). Some software platforms allow you to use accrual-based books for monthly management of the firm while also creating cash-basis statements for preparing tax returns. Look into the pros and cons of both methods for your firm, then be consistent going forward to ensure your records are accurate and easy to track. To ensure your firm’s financial statements are accurate, complete, and up-to-date, you need to use sound bookkeeping for attorneys.

Find more information about IOLTA and trust accounting requirements on the Rules and Resources page. Trust accounts are one of the most common areas where legal accounting mistakes are made. Whether you mismanage the accounts, put funds in the wrong account, accidentally use funds, or fail to report correctly, trust accounting errors are a big deal in accounting for law firms. Trust accounting mistakes can lead to penalties, suspension, or even losing the right to practice law. The Florida Bar Foundation [4] launched the first American IOLTA program in 1981.

What to look for in a legal accountant

Therefore, it’s imperative that you work with a banking institution that understands how IOLTA account earned interest must be transferred and that you have legal accounting software in place that can record these transfers accurately. Remember – there are large fines and big consequences that can result from depositing client funds into your firm’s regular operating accounts. Keeping your clients’ trust accounts reconciled monthly is mandatory and typically the first thing an auditor will review. Running bank reconciliations is easy and error-proof—just open the trust bank account and select the transactions listed in your latest financial statement or import bank account statements for auto-clearing.

Under Rule of Professional Conduct 1.15B, Illinois lawyers are required to deposit funds of clients and third persons into IOLTA accounts unless those funds can otherwise earn net income for the client or third person. The handbook is a practical guide created to help attorneys comply with the record-keeping standards for client trust accounts, including IOLTA. The handbook includes the standards What is Legal Accounting Software For Lawyers and statutes relating to trust accounting, a step-by-step description of how to maintain a client trust account and sample forms. For general requirements regarding trust accounts and record-keeping standards, see Rule of Professional Conduct 1.15. While this all may seem simple enough on paper, in practice, properly handling an IOLTA can be incredibly complex and time consuming.

An IOLTA Account Must Comply with Three-Way Reconciliation

To start with, CosmoLex has built-in protection tools for trust accounting, like a stoppage on ledger overdrafts and fund commingling. In fact, law firms can easily perform effortless trust reconciliations with our audit-ready tools that ease mandatory trust accounting requirements. Running bank reconciliations, including three-way reconciliations, can be done in just a few clicks, and financial data reports can be archived for security purposes. Trust accounting is the practice of keeping client funds given in trust (including unearned fees paid as a retainer, settlement funds, court fees, or advanced costs) in a separate account from law firm operating funds. Attorneys routinely receive client funds (commonly referred to as “trust money”) to be held in trust for future use. If the amount is large or the funds are to be held for a long period of time, the attorney customarily places these funds in an interest-bearing account for the benefit of the client.