What is an IOLTA Account & 5 Mistakes to Avoid

iolta accounting

(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. There is a very good reason why it’s important to set up and establish an IOLTA account with a financial institution that understands the rules surrounding them. For a law firm that is in the process of establishing their first IOLTA account, certain rules are quite clear, and others you may need to dig a bit deeper to find.

While you’ve spent years honing your skills to become a great lawyer, you didn’t learn about accounting or bookkeeping for attorneys at law school.
To prevent misappropriating funds from other clients, remember to only charge your clients for fees directly relating to their trust account.
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).
In this rule, lawyers are required to hold client funds in one of two types of client trust accounts.
A firm that doesn’t take the correct measures to ensure that the interest earned on their IOLTA trust account is transferred appropriately to the state IOLTA program can find themselves facing some serious fines or legal consequences.
For example, client funds in trust accounts cannot commingle with money held in the firm’s general accounts.

After opening your IOLTA check frequently to ensure you’re in line with local and federal regulations. CosmoLex has specific safeguards in place to prevent breaches of legal compliance when working with these complex transactions. For example, CosmoLex’s credit card https://www.wave-accounting.net/top-bookkeeping-services-for-nonprofit-companies/ processor, CosmoLexPay, automatically pulls fees from a designated legal account instead of from the client account. It involves a ton of inefficient, manual work—involving a lot of spreadsheets, paper invoices, inputting data entry, and struggles with collections.

Five Common Mistakes that Lawyers Make with IOLTA Accounts and How to Avoid Them

Every law firm has a responsibility to stay compliant with ethics regulations, and your firm is no exception. Ethics rules vary in each jurisdiction, but there are definitely some basics when it comes to accounting for law firms. Working with an accountant and the right legal practice management software will help ensure you have accurate record-keeping, and avoid the nightmare situation of malpractice.

We require two-factor authentication to be used by each CosmoLex user, to prevent unauthorized accounting system access. Finally, on each account, security permissions can be customized, so only the appropriate law firm employees can access the necessary information. To start, all data managed by CosmoLex’s legal practice management system, including case research, client demographic information, and messages sent on our secure client portal, are encrypted when entered into our system. We even store critical documents in an encrypted state, so no unauthorized viewers can ever obtain confidential information.

Monitoring the IOLTA account

So larger amounts of money held for single clients are exempt from the IOLTA program. That means, typically, that client funds eligible for IOLTA involve small amounts of money held for a long time, or significant amounts of money held for a short time. As was the case prior to IOLTA, lawyers must exercise their discretion in determining whether a given client’s trust deposit is Bookkeeping for Nonprofits: A Basic Guide & Best Practices of sufficient size or will be held for sufficient duration to justify the cost of being individually invested for a client. Related to the point above, attorneys must always have an accurate and up-to-date record where client’s funds are at any given time. While an increasing number of law firms accept payment electronically these days, some clients still prefer to pay by check.

While IOLTA is widely recognized and practiced across the US, and other countries, there are differences at the state level. Make sure you verify what rules apply to your law firm with your state bar association for rules that apply to your law firm. To further prevent any errors, IOLTA debits and credits should be recorded using a double-entry accounting system.

IOLTA Accounts Must Be Set Up in a Specific Way

For some firms, it may be much more realistic to turn to the experts for help when setting up an IOLTA trust account and making sure that all requirements are met, based on your state’s needs. Knowing that your law firm needs an IOLTA account is the first step to financial responsibility for your practice. Interest generated by IOLTA accounts forms an important source of funding for civil legal aid in Illinois. Unlike the criminal justice system, people with civil legal problems are not guaranteed an attorney. From the abused woman trying to find safety for herself and her children to the elderly woman being unlawfully evicted from her home, civil legal aid exists to ensure that all people have access to the civil justice system. While this primarily applies to new law firms, ensuring that the basics are determined and set up correctly is critical.

Your books will be ready for tax season and you can work confidently knowing your IOLTA is handled right.
Funds that are capable of generating net interest for an individual client must be deposited into a separate interest-bearing trust account with interest paid to the client.
Visualize and quantify all income, invoice payments, transactions connected to a client and IOLTA transactions with straightforward dashboard functionality.
This is a list of all your firm’s financial accounts, giving you a framework for where to record every transaction.

While any unearned client money is required to be deposited into a trust, it may or may not be mandatory to use an IOLTA, depending on the rules in your state. To confirm whether or not using them is required, it’s best to check in directly with your state bar association or a legal account expert. That said, given that an IOLTA raises money for a number of worthy causes, it’s almost always beneficial to use them. Small and mid-sized law firms especially love the fact that they can create professional-looking invoices and custom reports, and email them to clients with a click, which helps clients get their bills paid by their due date. The legal accounting software can even send automatic billing and late payment reminders to past-due clients to help clients stay on track with payments throughout their matter.