The 5 Most Common IOLTA Account Mistakes Small Law Firms Make (and How to Avoid Them)
The 5 Most Common IOLTA Account Mistakes Small Law Firms Make (and How to Avoid Them)
Managing an IOLTA account correctly is not optional for law firms, it's a compliance requirement. Yet, many small and growing firms unknowingly make mistakes that can put them at risk with their Bar Association.
These issues often show up when a firm is managing trust accounting on its own, has recently opened its doors, or hasn’t yet built standardized financial processes.
At Herman Ledge, we specialize in creating clear, repeatable financial systems that help law firms stay compliant and confident. Below are the five most common IOLTA account mistakes we see and what you can do to avoid them.
1. Not Reconciling IOLTA Accounts Monthly (Three-Way Reconciliations)
One of the most critical and frequently missed requirements for IOLTA compliance is monthly three-way reconciliation.
A proper reconciliation ensures that:
The bank balance matches your accounting software
Your trust liability register matches the bank
Individual client trust balances are accurate and fully accounted for
This process confirms that:
Every dollar in your trust account belongs to a specific client
No client’s funds are being used to cover another client’s expenses
Your firm is compliant with Bar Association trust accounting rules
Without regular three-way reconciliations, errors can go unnoticed and small issues can quickly become serious compliance problems.
2. Commingling Trust and Operating Funds
Commingling happens more often than firms realize and sometimes accidentally.
Common examples include:
Depositing a trust retainer into the operating account
Paying operating expenses directly from the trust account
Allowing payment processing fees to be deducted from trust funds
Even if accidental, commingling is still a violation and may require self-reporting to the Bar.
If a mistake occurs:
Correct it immediately
Transfer funds to the appropriate account
Document the correction clearly
When using payment processors, it’s essential that processing fees are charged to the operating account, not the trust account. Systems must be set up with guardrails that prevent fees from touching client funds.
3. Inaccurate or Incomplete Client-Level Trust Tracking
Another common issue is failing to properly allocate trust deposits at the client level.
For example:
A $10,000 deposit is recorded in the trust account
But the accounting system doesn’t show that $5,000 belongs to Client A and $5,000 to Client B
This lack of detail creates compliance risks and makes accurate reconciliation impossible.
Your trust records must clearly show:
Who each dollar belongs to
How much is held for each client
How balances change over time
Client-level tracking is not just a best practice it’s a requirement.
4. Transferring Fees Without Proper Documentation
Every transfer out of an IOLTA account must be supported by clear documentation.
This includes:
Legal fee invoices
Reimbursements for advanced client costs
Detailed records showing why funds were moved
Without documentation, your firm is exposed during a Bar audit or IRS audit.
Proper documentation should clearly show:
The invoice number
What services or costs were billed
When trust funds were applied
How much was transferred and why
Detailed invoicing and proper application of funds create a clean audit trail and protect your firm.
5. Relying on Software Without Proper Setup and Oversight
Practice management and accounting software can be powerful but only when set up correctly.
We frequently see firms assume that because they’re using software, their trust accounting must be compliant. Unfortunately, that’s not always true.
Improper setup can lead to:
Incorrect trust balances
Inaccurate reporting
Broken integrations between systems
Compliance violations
Ongoing oversight is just as important as initial setup. This includes:
Verifying integrations are working properly
Reviewing reports regularly
Having internal and external processes to catch errors
Technology is a tool not a substitute for professional oversight.
Staying Compliant Starts With the Right Systems
At Herman Ledge, we focus on building trust accounting processes that are:
Clear
Documented
Repeatable
Easy for your team to follow
From monthly reconciliations to system oversight, our goal is to ensure that if something breaks, misfires, or doesn’t sync properly, it’s caught and corrected before it becomes a problem.
Final Thought
If any of these mistakes sound familiar, take a moment to reflect:
Have any of these happened in the last year?
In the last six months?
Recently?
Now is the time to review your IOLTA account processes and bring everything back into compliance before an audit forces the issue.
If you need support, guidance, or a second set of eyes on your trust accounting systems, Herman Ledge is here to help.
