Continuing my posts on best practices for IOLTA accounts/transactions, I wanted to share this information with you. This information comes via the ABA Commission on IOLTA.
“Beginning January 2013, new IRS requirements regarding the reporting of credit card transactions will go into effect and may have the potential to negatively impact IOLTA accounts and lead to ethical violations by lawyers. Here are the key points about you will want to know about if you accept credit cards:
- Pursuant to the Housing Assistance Tax Act of 2008, credit card processing companies are required to verify and match each merchant’s federal tax identification number and her legal name with those found on file with the IRS. An EXACT match is required.
- For the purposes of this requirement, lawyers who accept credit card payments are considered “merchants.”
- If there is NOT an exact match between the information provided to the credit card processing company and the information on file with the IRS, there are serious consequences:
- Beginning January 2013, the IRS will impose a 28% withholding penalty on all credit card transactions, including those that the lawyer directs to her IOLTA account.
- If client funds that should be in the IOLTA account are withheld due to the lawyer’s failure to act and thus are not available to the client on demand, ethical issues are raised.
- The credit card processing company should have received information from the IRS if a mismatch occurred and already notified the lawyer of the problem. However, it is not known if all processing companies have provided such notice.”
What action should you take to avoid an ethical violation in 2013:
- Contact your credit card processor to verify that your legal name on your merchant account matches the legal name you use to file your tax returns;
- Correct mismatches if informed of one.
For more infomration: https://www.lawpay.com/news/irs60502.pdf
Tips and Techniques to Properly Manage Your IOLTA Funds (Interest on Lawyers Trust Accounts): Mismanaging an IOLTA account can have terrible consequences on a lawyer’s career, sometimes to the point of disbarment. For the month of December, I will be doing a series of posts to address questions you may have when handling your IOLTA accounting. This is an important topic whether you are just starting your law practice or if you have been practicing for years.
For this first post, let’s focus on the term commingling. Commingling attorney funds with client funds occurs when:
- The client’s funds are combined with the attorney’s personal funds;
- An attorney keeps his own money in the IOLTA account, this includes:
- Depositing money from a client into your IOLTA account that is a payment for an invoice for services performed;
- Failing to promptly withdraw earned fees from the trust account. Once you have undertaken the work and the client agrees that you have earned the fees, you have an immediate right to the funds on deposit in the IOLTA account intended to pay these fees. If you fail to promptly withdraw these earned fees from the trust account, you are commingling your funds (the earned fees) with client’s funds.
Today let’s look at the proper way to handle credit card payments from clients. Accepting credit card payments for advance fee deposit, while very acceptable, creates some practical issues that you need to decide how to handle. The options below assume that all credit card fees are being deducted from the operating bank account.
Option1: Set up two merchant service accounts:
- One for credit card payments on invoices to be deposited into the operating account, and;
- One for payments that are advance fee deposits to be deposited into IOLTA.
If your current merchant service provider says they can’t create two accounts to differentiate the credit card receipts, it will be too expensive or they can’t withdraw all fees from the operating account, please call me. You are probably paying too much already and I can recommend a vendor who can save you some money.
Option 2: Deposit all credit card transactions into your IOLTA account.
- Whoever is making the deposit entries into your accounting system, must have the ability to determine if the payment is an advance fee deposit or a payment for fees earned and invoiced. If it is for earned fees, your accounting person must promptly write a check out of IOLTA payable to the law firm for deposit into the operating account.
Option 3: Deposit all credit card payments into your operating account.
- If this is the procedure you choose to set-up, you must promptly remove all funds that are advance fee deposits. You accomplish this by writing a check out of the operating account, payable to your law firm, with reference to client name and matter, and deposit this check into the client’s IOLTA trust account.
Option #1 is the best practice for making sure no commingling of funds occurs. It is more efficient and less prone to errors. If you aren’t satisfied with the current procedures you are using for managing your IOLTA transactions, or other accounting functions, please contact me. I can refer you to someone who will be able to make this process easier and more automated – no matter what accounting system you are using.
Peggy Gruenke, Chief Operating Officer and Business Development, firstname.lastname@example.org
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