The Most Common IOLTA Accounting Mistakes Law Firms Make

Managing an Interest on Lawyers’ Trust Account, commonly called an IOLTA or IOTA account, requires careful recordkeeping and consistent oversight. Even a small bookkeeping error can create confusion about who owns the money in the account, whether client funds are properly protected, and whether the law firm’s records are complete.

Many trust accounting problems do not begin with intentional misconduct. They start with missed reconciliations, incomplete client ledgers, incorrectly recorded transfers, or a lack of clear procedures.

Understanding the most common IOLTA accounting mistakes can help law firms identify weaknesses before they become serious problems.

1. Mixing Client Funds With the Firm’s Operating Money

One of the most significant trust accounting mistakes is commingling client funds with money belonging to the law firm.

Money that belongs to a client or third party must generally remain separate from the firm’s operating funds. This can include:

• Unearned retainers
• Advance fee deposits
• Settlement proceeds
• Funds intended for medical providers
• Filing fees and other anticipated client costs
• Money being held while a dispute is resolved

The firm should not use trust funds to pay payroll, rent, marketing expenses, taxes, or other ordinary business costs.

Similarly, earned fees should not remain in the trust account indefinitely after the firm becomes entitled to them. Once fees are earned and properly documented, they should generally be transferred to the operating account according to the rules and procedures applicable to the firm.

The ABA Model Rules state that advance legal fees and expenses should be deposited into a client trust account and withdrawn only as fees are earned or expenses are incurred.

2. Failing to Maintain a Separate Ledger for Every Client

A law firm cannot determine whether it is holding the correct amount for each client by looking only at the total bank balance.

Every client or third party with money in the trust account should have an individual ledger showing:

• The amount deposited
• The date the money was received
• The source of the deposit
• Payments made from the account
• Transfers for earned fees
• Refunds to the client
• The remaining balance

Without individual ledgers, the firm may know that it has $75,000 in the bank but have no reliable way to determine who owns each portion of that money.

A complete client ledger should provide a running balance after every transaction. This helps prevent a firm from accidentally spending one client’s funds to cover a payment associated with another matter.

3. Not Completing Monthly Three-Way Reconciliations

Checking the IOLTA bank statement is not the same as completing a full trust account reconciliation.

A three-way reconciliation compares:

1. The adjusted bank statement balance
2. The trust account journal or general ledger
3. The combined total of all individual client ledgers

All three amounts should agree.

Florida trust accounting rules require attorneys using trust accounts to maintain specific records and perform monthly procedures. The Florida Bar has also emphasized that attorneys must conduct monthly reconciliations and reviews.

Skipping reconciliations can allow small discrepancies to continue for months. By the time the problem is discovered, the firm may need to review hundreds of transactions to determine where the difference began.

Monthly reconciliation makes it easier to identify:

• Missing deposits
• Duplicate entries
• Outstanding checks
• Bank fees
• Incorrect transfers
• Transactions assigned to the wrong client
• Unauthorized account activity

Any discrepancy should be investigated, explained, and corrected rather than carried forward without resolution.

4. Allowing a Client Ledger to Fall Below Zero

An individual client ledger should not have a negative balance.

A negative balance generally means the firm has paid out more money than it was holding for that client. When this happens, funds belonging to other clients may effectively be covering the shortage.

Negative balances can result from:

• Paying an invoice before the client’s deposit clears
• Transferring more in fees than the firm has earned
• Posting a withdrawal to the wrong matter
• Recording a deposit under the wrong client
• Failing to account for bank charges
• Disbursing settlement funds too early

Law firms should review client balances before every withdrawal or transfer. The available amount should be confirmed through the client ledger, not simply by checking whether the overall trust account contains enough money.

5. Transferring Fees Before They Are Earned

Advance fees placed in trust do not automatically become the law firm’s money when they are received.

The firm should have a clear process for determining when fees are earned. That process may involve completing work, issuing an invoice, obtaining any required client authorization, and recording the transfer in both the client ledger and the trust account journal.

Transferring money too early can create a shortage in the client’s account. Transferring the wrong amount can also cause the client ledger, trust journal, and bank account to stop matching.

Every transfer of earned fees should be supported by documentation, such as:

• A client invoice
• A billing statement
• A time or expense report
• The applicable fee agreement
• A record of the electronic transfer or check
• Updated trust and client ledgers

Clear documentation makes it possible to understand why money left the trust account and how the amount was calculated.

6. Recording Deposits Under the Wrong Client Matter

A deposit can reach the correct bank account but still be recorded incorrectly.

For example, two clients may make deposits for the same amount on the same day. If the payments are assigned to the wrong matters, the overall IOLTA bank balance may still appear correct. However, both client ledgers will be inaccurate.

One client may appear to have more money available than the firm is actually holding, while the other may appear to have a shortage.

Every deposit record should identify:

• The client or third party
• The related matter
• The amount received
• The date received
• The payment method
• The purpose of the payment

Deposit slips, payment confirmations, copies of checks, and electronic transaction records should be retained so the transaction can be traced later.

7. Disbursing Funds Before a Deposit Has Cleared

A deposit appearing in online banking does not always mean that the funds are fully collected and available for disbursement.

Checks can be returned, electronic payments can be reversed, and fraudulent payments may initially appear legitimate. If a law firm distributes money before the original deposit has cleared, the trust account may be left with a shortage.

Before issuing settlement payments, refunds, or other disbursements, the firm should confirm that the underlying funds have been collected according to its bank’s procedures and any applicable professional requirements.

Law firms should be particularly cautious when a client or third party requests an urgent transfer shortly after making a deposit.

8. Paying Bank Fees With Client Money

Monthly service charges, wire fees, check-printing charges, returned-payment fees, and similar expenses can reduce the trust account balance.

If these charges are deducted from client funds, the amount in the bank may become lower than the total amount shown on the client ledgers.

ABA Model Rule 1.15 permits a lawyer to deposit the lawyer’s own funds into a trust account only in an amount necessary to pay bank service charges. State-specific requirements may differ, so attorneys should review the rules that apply in their jurisdiction.

Firms should regularly review bank statements for unexpected fees and confirm that charges are recorded properly.

9. Ignoring Old Outstanding Checks

An outstanding check is a payment recorded in the law firm’s books that has not yet cleared the bank.

It is normal for some checks to remain outstanding at the end of a month. However, checks that remain uncashed for an unusually long time should be investigated.

The recipient may have:

• Lost the check
• Never received it
• Changed addresses
• Chosen not to deposit it
• Died or closed the business
• Been incorrectly identified

An old outstanding check should not simply be removed from the records to make the account balance. The firm should determine why it remains outstanding and follow the applicable rules for replacing the check, contacting the payee, handling unclaimed funds, or taking another appropriate action.

10. Making Corrections Without an Audit Trail

When an error is discovered, it may be tempting to delete or overwrite the original transaction. That can make the records harder to understand later.

Corrections should create a clear audit trail showing:

• What the original entry was
• Why it was incorrect
• When the correction was made
• Who authorized the correction
• Which client or matter was affected
• What supporting documentation exists

The goal is not merely to make the totals match. The records should explain how the discrepancy occurred and how it was resolved.

Accounting software designed for law firms may help preserve transaction histories and supporting records, but the firm still needs consistent internal procedures.

11. Relying on a Bookkeeper Without Reviewing Their Work

A law firm may delegate trust accounting tasks, but it cannot delegate its responsibility for safeguarding client money.

Not every general bookkeeper understands:

• IOLTA requirements
• Three-way reconciliation
• Client-level trust ledgers
• Earned-fee transfers
• Settlement disbursements
• Trust account documentation
• The prohibition against negative client balances

The ABA has advised law firms to confirm that their accountant or bookkeeper has a defined process for completing three-way trust reconciliations.

Attorneys should receive and review reconciliation reports regularly. At a minimum, the review should look for unexplained differences, negative balances, old outstanding checks, unusual transfers, missing records, and transactions that have not been assigned to a client.

12. Failing to Retain Complete Trust Account Records

Trust accounting records should be organized and easy to retrieve.

Depending on the jurisdiction, required records may include:

• Bank statements
• Canceled checks or check images
• Deposit slips
• Wire transfer confirmations
• Cash receipt and disbursement journals
• Individual client ledgers
• Monthly reconciliation reports
• Billing records
• Settlement statements
• Records supporting earned-fee transfers
• Documentation of corrections

Florida Bar guidance identifies bank-generated records, including statements, deposit records, and canceled checks, as part of the records lawyers must maintain.

Incomplete records can make it difficult to demonstrate that the correct amount was held for a client, even when the original transaction was proper.

How Law Firms Can Reduce IOLTA Accounting Errors

The best way to prevent trust accounting problems is to establish a consistent system rather than relying on memory.

A strong process should include:

• Recording transactions promptly
• Maintaining a separate ledger for each client
• Reviewing available client balances before disbursements
• Documenting every transfer
• Completing monthly three-way reconciliations
• Investigating discrepancies immediately
• Reviewing outstanding checks
• Restricting access to the trust account
• Keeping supporting documents organized
• Having an attorney review reconciliation reports

Law firms with more than one attorney should also determine whether their jurisdiction requires a written trust account plan or designated responsibilities for account oversight. Florida has required firms with more than one attorney to maintain a written trust account plan for each trust account.

Get Help With IOLTA Bookkeeping and Reconciliation

Trust accounting requires more than entering deposits and writing checks. Every transaction must be recorded in a way that shows whose money is being held, why it moved, and how much remains available.

A&W Associates provides bookkeeping, IOLTA account management, and reconciliation support for law firms in Wesley Chapel, Tampa, and throughout the Tampa Bay area. We help attorneys maintain organized records, monitor client balances, and identify accounting discrepancies before they grow into larger problems.

Contact A&W Associates to learn more about professional bookkeeping support for your law firm.

This article is provided for general informational purposes and does not constitute legal advice. Attorneys should review the trust accounting rules applicable to their jurisdiction and consult appropriate legal or ethics counsel when necessary.