An IOLTA account, short for Interest on Lawyers Trust Account, holds money a law firm is keeping for clients rather than money the firm has earned. California increased its oversight of those accounts beginning in 2022 and has expanded it since. What the oversight asks for is records: what came in and what went out, broken down by client, with a monthly reconciliation. The sections below walk through what changed, the records a firm maintains, how the deposits are treated on the books and how costs paid on a client's behalf are recorded. Most of it is familiar bookkeeping, but with some additional details needed.
What changed in 2022
Audits were less common in previous years. An examination often came about when something prompted it: a client complaint, a bank report of an insufficient funds item or a fee dispute. That changed in 2022 when California adopted new oversight rules following a review of past mishandling of client funds. Firms holding client funds register their trust accounts with the State Bar each year, and some are selected for a review of the records.
Firms of many sizes have been found missing one or more of the records those reviews ask for. The rest of this article is about how those records get produced.
What the records consist of
A firm holding client funds keeps the trust account transaction report (all deposits and withdrawals), the same report filtered by client, the bank statements, the canceled checks, and the monthly reconciliation report.
Whose money is in the account
Most firms hold client funds in a single pooled account. The balance in that account is the sum of many smaller balances, each belonging to a named client. Ordinary bookkeeping asks what a transaction was for. IOLTA bookkeeping asks the same question and one more: which client the money belonged to.
The balance in the account is the sum of many smaller balances, each belonging to a named client. Illustrative figures.
For those interested in the accounting side
Under cash basis bookkeeping money received by a business is ordinarily recorded as Income on the date it is received. A client's advance deposit into an IOLTA account is the exception. The money stays the client's while the firm holds it. The firm pays court costs from it on behalf of the client, and the balance can be returned if the client requests it.
The Balance Sheet reflects this. The Trust Bank Account appears as an Asset, and a Liability account for Client Trust Funds Held appears at the same figure. The Liability total is the sum of the individual client balances, and each of those falls as fees are earned and costs are paid. The Profit and Loss shows nothing when the money is received because nothing has been earned. Income is recorded on the date an earned fee is transferred from the Trust Bank Account to the Operating Bank Account.
Example: a $5,000 advance fee deposit
A client deposits $5,000 as an advance fee for a family law matter.
| Event | Trust Bank Account Asset |
Client Trust Funds Held Liability |
Operating Bank Account | Profit and Loss |
|---|---|---|---|---|
| Deposit received$5,000 advance fee | + $5,000 | + $5,000 | no change | unchanged |
| Filing fee paid from truston the client's behalf | − $435 | − $435 | no change | unchanged |
| Firm invoices for work performedearned fee transferred to operating | − $1,200 | − $1,200 | + $1,200 | + $1,200 Fee Income |
| Case concludes, balance refunded | − $3,365 | − $3,365 | no change | unchanged |
| After the matter closes | $0 | $0 | $1,200 | $1,200 |
Only the $1,200 earned fee appeared on the Profit and Loss.
Only the $1,200 earned fee appeared on the Profit and Loss. The filing fee did not appear as a firm Expense since the firm paid it with the client's money rather than its own. A cost the firm advances from its Operating Bank Account and bills back later is recorded differently, as a Receivable from the client. A true retainer paid to secure availability sits outside all of this since it is earned on receipt.
The costs paid on behalf of clients
A single matter can produce a long series of small payments out of the pooled account. Common ones include:
- Court filing and electronic filing fees
- Service of process and courier charges
- Certified copies and recording fees for deeds and other documents
- Publication of required notices
- Probate referee or appraiser fees
- Bond premiums
- Court reporter and transcript charges
- Expert, consultant, and title or records search fees
- Mediation or arbitration administrative fees
Example: A firm pays a filing fee and a publication cost for one client in the same week. The trust account transaction report shows two disbursements. The report for that client shows two reductions.
Cost advances come at unpredictable intervals, which makes the client name easy to postpone. Entering it at the time of payment keeps the record complete without a later reconstruction.
The monthly reconciliation
The monthly reconciliation ties three figures together: the bank statement balance, the balance on the trust account transaction report and the sum of all individual client balances.
A firm can reconcile the bank statement each month and skip the step of confirming that both of those figures match the total of the client balances. The three-way comparison is what catches a negative client balance early. A negative balance means funds held for one client were used for another client's costs, and in most instances it traces back to a timing error rather than anything more.
Where a spreadsheet keeps up and where it stops
Where a spreadsheet keeps up
With one or two clients holding funds a spreadsheet with a tab per client does the job and does it well.
Where it stops
Partial deposits, cost advances on different dates, transfers of earned fees, and refunds of unused balances multiply the number of places a single figure gets entered by hand.
The picture changes as cases accumulate. Software built for trust accounting, or general accounting software set up with client tracking and a dedicated trust account, produces the per-client breakdown from the same entries.
What the records answer
The attorney is responsible for the account. The bookkeeper maintains the history, and the attorney and the CPA work from it.
The money sitting in an IOLTA account is there for a reason that matters to the person it belongs to: a filing that lets an estate move forward, a settlement waiting to reach a family, an expense paid so a case can close. Records kept in the ordinary course let a firm say what belongs to whom on any day someone asks.
This article is intended for general informational purposes and is not a substitute for legal or tax advice. For guidance specific to your situation, an attorney or CPA is the right resource.