Top 5 IOLTA Mistakes Law Firms Make

IOLTA accounts are meant to safeguard client trust money, yet many firms still stumble over compliance details that can trigger audits and penalties.

Disclaimer: This article is for educational purposes only and does not constitute tax or legal advice. United States, 2025.

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Why IOLTA compliance matters

Interest on Lawyers’ Trust Accounts (IOLTA) programs were created in the 1980s to generate interest on pooled client funds for public purposes, mainly supporting legal aid. Every state bar association has its own set of rules, but the principle is the same: client money held in trust cannot benefit the law firm directly. When handled properly, IOLTA accounts preserve client trust and keep attorneys in good standing. When handled poorly, the consequences can include fines, professional discipline, or even disbarment.

The American Bar Association has long emphasized that the most common mistakes are not malicious but procedural. Small firms and solo practitioners, who may not have a full back-office team, are particularly vulnerable to lapses. Understanding the recurring pitfalls is the first step toward avoiding them.

Mistake 1: Commingling client funds with operating money

The clearest rule in trust accounting is also the one most frequently broken. Funds that belong to clients must never be deposited into the firm’s operating account. Yet bar disciplinary records show that this remains one of the top violations. According to the State Bar of California’s 2024 discipline report, nearly one third of trust-accounting cases involved commingling. Even when the intent is simply to cover a short-term expense or “move the money back later,” regulators treat it as misuse of client funds.

Firms that keep a separate, well-reconciled IOLTA account not only protect themselves but also simplify their bookkeeping. The risk of audits or sanctions drops significantly once client and firm funds are clearly separated.

Mistake 2: Failing to perform three-way reconciliations

Most states require monthly three-way reconciliations: comparing the IOLTA bank statement, the firm’s internal trust ledger, and the individual client sub-ledgers. Missing this step is a red flag for auditors. In 2023, the North Carolina State Bar published a compliance survey showing that more than 40 percent of small firms failed to document monthly reconciliations, often because the task was delegated informally or pushed off during busy seasons.

Without these reconciliations, firms may not notice discrepancies until they become severe. Even small clerical errors can snowball, creating gaps that take weeks to unwind. Regulators emphasize that documenting the reconciliation is just as important as doing it.

Mistake 3: Poor record-keeping and lack of documentation

Trust accounting depends on meticulous records. Yet many lawyers still rely on generic spreadsheets or even handwritten notes. The Florida Bar has frequently  disciplined attorneys who could not produce client-specific records during random audits. In one 2024 case, an attorney was suspended for 90 days after failing to show ledger entries for more than $75,000 of client funds, even though the money itself was intact.

The issue was not theft but lack of documentation. Regulators consider this just as serious because the absence of records undermines client confidence and makes oversight impossible. Modern accounting software, tailored to legal practices, has made it easier to keep compliant records, but only if firms use it consistently.

Mistake 4: Improper handling of client advances and retainers

Another frequent mistake is misclassifying advance fees or retainers. In most jurisdictions, unearned retainers must be deposited into the IOLTA account and only transferred to the operating account as work is performed. However, disciplinary cases show that many attorneys deposit retainers directly into operating accounts, treating them as income immediately.

The Massachusetts Board of Bar Overseers reported in 2024 that nearly 20 percent of its trust account investigations stemmed from improper handling of advances. These errors are not always intentional, but they can still lead to restitution orders and sanctions. Firms should review their jurisdiction’s specific rules on retainers, as terminology can differ by state.

Mistake 5: Ignoring overdrafts and bank notifications

Every IOLTA program has agreements with participating banks to notify state bars of overdrafts or suspicious activity. This means that even a temporary overdraft, caused by timing issues, will trigger a notice to regulators. The Illinois Attorney Registration and Disciplinary Commission (ARDC) noted in its 2025 annual report that overdraft notices were the leading source of new trust account investigations.

The underlying error is often as simple as failing to track disbursement dates or not confirming cleared deposits. Yet the consequences are anything but minor. Once a notice is issued, the bar association can open a full audit of the firm’s trust practices, even if the overdraft was a one-time mistake.

The ripple effects of IOLTA mismanagement

Beyond fines and audits, mishandling trust accounts damages client relationships. Clients who learn of accounting irregularities may question whether their money is safe, even if their  funds are not missing. For firms competing on reputation, the perception of unreliability can be just as damaging as actual penalties.

There is also a broader systemic cost. IOLTA programs fund legal aid across the United States. Mismanagement not only jeopardizes compliance but also undermines confidence in a funding mechanism that supports access to justice for low-income individuals.

Moving toward better practices

The good news is that these mistakes are preventable. State bar associations provide detailed guidance, and many offer free webinars or compliance checklists. Some banks even provide templates for monthly reconciliations. Firms that invest in proper training and software often see an immediate improvement in accuracy and peace of mind.

The American Bar Association’s 2025 compliance review noted that firms with dedicated accounting support had 50 percent fewer reported violations. This shows that building trust is not only about ethics but also about infrastructure.

Conclusion

IOLTA accounts exist to protect clients and support the broader justice system. The most common mistakes, commingling, skipping reconciliations, poor records management, mishandling retainers, and ignoring overdrafts, are not complex errors but failures of process and attention. Law firms that prioritize compliance protect their clients, their reputation, and their profession.

The challenge is real, but so is the opportunity. By strengthening internal controls today, firms can avoid costly audits tomorrow and operate with confidence in serving their clients.

What can your firm do?

At LW Accounts, we offer specialized accounting services to law firms. Our team understands the strict compliance requirements, the unique workflows of legal practices, and the serious consequences of even small IOLTA mistakes. We don’t just manage your numbers, we give you peace of mind by ensuring your trust accounting is accurate, compliant, and audit-ready.

Book a free consultation with us to discuss how your firm can strengthen trust accounting procedures and avoid the pitfalls that lead to disciplinary actions.