My guess is no…at least after looking at many law practice’s books, it seems almost no law firm has an accurate IOLTA balance.
One of the scariest things about bookkeeping for attorneys is dealing with trust or IOLTA accounts. You start off with a small practice and you know exactly how much money each of your 5 clients has in their trust account and you can verify that exact amount is actually in the IOLTA account.
But then, you start to grow and now you have 10 clients and all of a sudden the numbers don’t match. You don’t know why and don’t have time to figure it out. Maybe you throw some extra money into that account so you can be certain you have more money in there than you should.
Now all of a sudden, it is 10 years later and your IOLTA account balance is way off from what you think should be in there OR you honestly have no idea how much “should” be in your IOLTA account. One attorney told me she thought she had over $50,000 extra sitting in their IOLTA account to cover any possible errors.
$50,000 that could have potentially been earned income!!! Money that could be used to grow your law practice or paid out to the partners or owner of the law practice. Money that should have been taxable in previous years….meaning if the IRS came knocking, you would owe back taxes and penalties on that money.
So your trust balances aren’t accurate…now what?
The first thing to do in to ensure the accuracy of your IOLTA account balance is compare it to your bank statements. Does the balance on your bank statement match your bank balance in QuickBooks, Xero, Excel or whatever software you are using to keep track of your trust balance?
If the answer is no, then you know what you need to tackle first is to get the balances to match. The best and easiest way to do this, is to reconcile your statements. Click here to learn how to reconcile your bank statement. Once you have made the bank statement match the balance in QuickBooks, you are ready for the next step.
The next thing to do is to look at each client who has a trust account balance and add those up. Any client with a negative trust balance should be disregarded. For example, let say you have a client who owes you $500 as a retainer, they would have a negative trust balance. Or let’s say you paid out a portion of a settlement before you received the settlement check, the client would have a negative trust balance.
Do not count these negative balances. If you do, you will be taking money out of another client’s trust balance. Instead, only add up the positive trust balances. This total should match the total on your bank statement. If it doesn’t, you need to either add in money or take out money from the IOLTA account to make it match.
This may seem overwhelming especially if you have 10 years of inaccurate balances, but it is important both to the Bar Association and to the IRS. If you need help getting this straightened out, we are here to help. Send an email over to firstname.lastname@example.org to start getting your trust account accurate.