IOLTA Tip #3: Properly Maintaining IOLTA Accounting Records

 

checkbookEvery lawyer who holds money for clients must have a system in place for maintaining and properly recording all transactions related to these funds. There are many resources available to read and review. In this article, I offer a few tips to make sure you have proper accounting procedures in place for handling client funds held in your IOLTA account.

 

Here are a few basic facts before discussing accounting procedures:

 

  • The “IOLTA” acronym stands for “Interest on Lawyers’ Trust Accounts”;
  • The basic nature of an IOLTA account is that it is, in essence, an escrow account, for the deposit of unearned client funds. The interest earned on these accounts generates revenue for the state’s legal aid fund.

 

  • Lawyers are required to send itemized bills to clients at the time the lawyer withdraws funds from a trust account to pay themselves for services. These itemized bills should show:
    • the services provided with a description and dollar amount;
    • the amount withdrawn from the client’s trust account to pay the bill;
    • the amount of funds the lawyer continues to hold in the client’s trust account after withdrawal for payment of the invoice.
  • Lawyers should not make withdrawals from trust accounts by ATM or checks payable to “Cash” and are required to use pre-numbered checks.

 

For the trust accounting, you also need:

 

1)    The trust bank account balance to match the trust liability account balance.

 

2)    A ledger for each client’s trust balance, the total of which equals the trust bank account balance.

 

3)    A detailed ledger, for each client, showing the ins and outs of the trust monies.

 

When it comes to your trust accounting, there’s one requirement that affects lawyers and other legal professionals and doesn’t exist in most other professions. It’s called the 3-way reconciliation report. The Rules of Professional Conduct require lawyers to demonstrate that their financial records accurately reflect all of the transactions in which a client has given them monies “in Trust.”  The “three-way” reconciliation accomplishes this by comparing the total of the individual client ledgers and the bank charges with the balance in the check register. Both amounts should be the same. http://goentrust.com/what-is-a-3-way-reconciliation/

 

How  a 3-way reconciliation works:

 

  1. The first part of the reconciliation is the Checkbook Register.
  2. The second piece is the Bank Statement
  3. The third piece is the IOLTA Balance Register (or Trial Balance). This is a report of all client trust transactions, deposits and withdraws, showing a final balance for each client.

 

To complete the 3-way match you first reconcile the Checkbook Register to the Bank Statement.  The Bank Statement must match the Checkbook Register after taking into account any withdrawals or deposits that have not yet cleared the bank.  Most people are familiar with this process as it is the same as balancing your personal checkbook.

 

Once that is complete, you need to make sure the Checkbook Register matches the total on the IOLTA Balance Register.

 

The first step shows you have recorded in your checkbook all of the transactions that cleared the bank.  The second step shows you have recorded all of the transactions which affect the client’s IOLTA balance.

 

There are plenty of IOLTA resources out there. It’s a matter of accessing those resources. The best thing that you can do with respect to IOLTA accounting is to access the available information, and to learn as much as you can. Then, create a system for managing your IOLTA accounting, and follow, in addition to the ethical rules, your own internal procedures, which should include monthly three-way reconciliation.

 

Peggy Gruenke, Chief Operating Officer and Business Development. More articles available on my blog LawBizCOO.

Tip #2: IOLTA/Credit Cards – New IRS Section 6050W & How it Affects Attorneys

IOLTAContinuing 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:

  1. 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.
  2. For the purposes of this requirement, lawyers who accept credit card payments are considered “merchants.
  3. 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:
    1. 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.
    2. 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.
    3. 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

Tip #1: Handling Credit Card Payments and IOLTA

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:

  1. The client’s funds are combined with the attorney’s personal funds;
  2. 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, pgruenke@lawbizcoo.com

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