Common Mistakes that Lawyers Make With IOLTA

Lawyers have always been one of the most demanding and stressful professions. Despite the fact that a good lawyer requires many years of study and practical experience, managing a successful law firm is a different story. It is hard to find practical guidance at law schools, especially when referring to Lawyer Trust Accounts (IOLTAs) because schools do not always focus on how to deal with them. Using trust accounting software and legal-specific software is essential for managing trust accounts accurately and efficiently, as these tools are designed to address the unique needs of legal practices. Most lawyers have little or no knowledge of how to manage a client trust account California before they need to open one. Specialized knowledge in law firm trust accounting is crucial, yet often lacking, which increases the risk of mistakes. Poor management of lawyer trust account may lead to terrible consequences no one expects. Such poor management can result in severe consequences, including disciplinary actions and legal penalties. The worst-case scenario could be disbarment in some circumstances. Trust accounting mistakes can also have serious consequences, such as audits, sanctions, or loss of license. Our law firm bookkeeping services will give you some most common mistakes and how to avoid them. It is important for lawyers to stay up to date with the latest trust accounting rules and best practices to avoid costly errors.

What is IOLTA and how it works?

You may be required to open an IOLTA bank account if you are an attorney and receive an advanced fee from your client. Lawyers are required to keep the client's funds in a separate account, known as a trust account or IOLTA, to comply with trust accounting rules and prevent commingling of funds. IOLTA is the acronym for Interest on Client Trust Account California. It is a type of Client Trust Account – CTA.

Funds in an IOLTA typically include retainer fees and fee advances. Attorneys may only withdraw money once it has been earned. For example, if you receive a $12,000 retainer and bill 2 hours at $100/hour, you can move $200 to your business account, while the remaining $11,800 must stay in the IOLTA.

By law, attorneys cannot keep the interest generated from IOLTA accounts. Instead, this interest is directed to the State Bar’s IOLTA program to fund legal aid, education, and access to justice for low-income individuals.

Three common mistakes in Lawyer Trust Account

As a lawyer, you should avoid making these three mistakes related to the IOLTA, or Client Trust Account California. Otherwise, it can lead to serious repercussions that you wouldn’t expect in your career.

1. Borrow money from the account

Lawyers must never borrow money from a Client Trust Account (CTA/IOLTA), even temporarily. These accounts are meant solely to hold client funds, and using them for firm cash flow issues violates ethical rules.

Borrowing from a trust account can lead to severe penalties, including disciplinary action or even disbarment. The state bar holds attorneys accountable for any misuse, even if it is done by staff or paralegals.

To prevent misuse, law firms should hire an experienced accountant or bookkeeper familiar with IOLTA rules. Strict monitoring and internal controls can ensure that client funds remain untouched.

2. Failure to separate your client funds and business accounts

Client funds must remain separate from a law firm’s business account. Some attorneys mistakenly deposit checks into the business account without allocating court fees or unearned amounts correctly.

Mixing funds is a violation of ethical and state bar rules, potentially triggering audits, fines, or disciplinary action. It also undermines client trust and exposes the firm to legal liability.

Always transfer earned fees to the business account after services are completed, and never use trust accounts for operating expenses. Clear bookkeeping practices and professional oversight are essential.

3. Failure to Monitor Client Funds accordingly

Detailed records are critical for tracking deposits, disbursements, and client balances. Lawyers who fail to maintain accurate IOLTA records risk losing track of client funds or missing required reporting.

Poor monitoring can result in errors, client disputes, and non-compliance with state bar rules. In extreme cases, it can lead to investigations or financial penalties.

Implement regular bookkeeping practices and use accounting software designed for law firms. Assigning a qualified bookkeeper to track client funds ensures transparency and compliance.

Attorneys must keep law firm bookkeeping and records that show how much money each client holds in trust at any moment, as mandated by the bar association. Suggestions from the ABA states that IOLTA records should allow tracing “all deposits and disbursements through the account, and each such transaction should be associated with a particular client.”

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 4. Charging payment processing fees to IOLTA

Payment processing fees should never be deducted from client funds in trust accounts. IOLTA accounts are strictly for client money, and fees are the responsibility of the law firm.

Charging fees to client funds is a violation of trust account rules and can lead to disciplinary action or mandatory reimbursement to clients. It also damages the firm’s reputation.

Pay all processing fees from the business account, not the IOLTA. Document all transactions clearly and maintain oversight to prevent accidental deductions from client funds.

5. Not seeking professional bookkeeping helpTrust accounting is complex, and mistakes can happen when law firms manage IOLTA accounts without expertise. Many errors arise from misunderstanding rules or poor bookkeeping practices.

Lack of professional guidance increases the risk of mismanagement, audit failures, and non-compliance with state bar requirements. Errors can be costly and impact both clients and the attorney’s career.

Engage a professional bookkeeper or accountant experienced with law firm trust accounts. Expert guidance ensures accurate records, compliance, and peace of mind for attorneys and clients alike.

You always have the option to hire professionals from outsourced law firm bookkeeping services who have experience in the lawyer trust account.

Irvine Bookkeeping offers a full range of law firm bookkeeping services and promises that in 2-3 weeks, we clean up a whole book for you to prepare for tax seasons. We believe knowing your company's financial health is the key to maintaining control of your business.

As a business owner, if you see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.

Call Irvine Bookkeeping now for a Free Quote!

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