IOLTA stands for Interest on Lawyers' Trust Accounts. Every state has one. It is a pooled, interest-bearing trust account attorneys use to hold client funds that are too small or too short-term to be worth investing in a separate account for the client. The interest earned on the pool does not go to the client and does not go to the firm. It goes to the state's legal aid programs to fund pro bono services and access to justice.
If you handle client money as an attorney (retainers, settlements, filing fee advances, escrow, closing funds), you almost certainly need an IOLTA. In most states, participating in the IOLTA program is not optional. The state bar assumes every practicing attorney with client funds has one.
An IOLTA is not a firm asset. Not a moment, not a dollar of it. It is money the firm is holding on behalf of clients, and the rules around handling it are stricter than the rules around anything else in the practice.
State bar rules vary in the specifics, but every state's version of Rule 1.15 (or its equivalent) enforces the same core discipline:
No commingling. Firm money and client money cannot sit in the same account. Ever. Even briefly.
No firm expenses paid from trust. Trust funds cannot be used to pay rent, salaries, subscriptions, or any firm operating expense. Only client-related disbursements, on the specific matter the money was received for.
Every dollar tracked to a specific client and matter. Not "the trust account has $47,000 in it" but "Client A has $12,000, Client B has $8,500, Client C has $26,500."
Regular reconciliation. Most state bars require three-way reconciliation on a fixed schedule (usually monthly, sometimes quarterly). Missing the reconciliation is itself a rule violation, before any other problem is even discovered.
Prompt notice and disbursement. When funds arrive for a client, the client has to be notified. When funds are earned or owed, they have to be moved out of trust promptly, not left there indefinitely.
Records kept for the state's retention period. Usually five to seven years, depending on the jurisdiction.
Violating any of these can trigger a bar complaint, an audit, or discipline. Trust violations are one of the top causes of attorney suspensions and disbarments nationwide.
Not every dollar of client money belongs in an IOLTA. The rule of thumb built into most state programs:
IOLTA
IOLTA is for client funds that are either small in amount or short-term in duration, where the cost and administrative burden of a separate interest-bearing account would exceed any interest the client could earn. Filing fee retainers, small settlements passing through, short-term escrow.
Separate interest-bearing trust accounts
Separate interest-bearing trust accounts (sometimes called client trust accounts, non-IOLTA, or CTA) are for larger balances or longer-term holdings where the client should actually earn the interest. Large settlements held for months, estate funds, real estate closing balances of significant size.
The attorney
The attorney is responsible for deciding which type of account a given deposit belongs in. Getting this wrong is not usually a discipline-level violation, but it is a mistake worth avoiding, and it depends on the specific facts of the matter.
Three-Way Reconciliation, Explained
The single most important control in IOLTA compliance is the three-way reconciliation. It is the monthly discipline that catches errors before they become violations.
The three things that have to match, to the penny, every month:
The bank statement on the trust account
The firm's trust account ledger (the running record of every deposit and disbursement)
The sum of every individual client's sub-ledger (each client's running balance)
If all three agree, the account is in order. If any two disagree, something is wrong: a missed entry, a misapplied disbursement, a client sub-ledger that has gone negative, or a deposit that landed in the wrong matter. And it has to be found and fixed before the next month closes, because the errors compound.
Legal practice management software (Clio, MyCase, PracticePanther, and the rest) tracks what the ledgers should say. Your bank tracks what the account actually holds. The reconciliation is the work of comparing the two, every month, and it does not happen automatically. Someone has to do it, and they have to know what they are looking at.
Thirty minutes on your practice, your trust setup, and what is or is not being reconciled today.
Step 2
Trust integrity check
We look at the last three months of trust activity, the client sub-ledgers, and the current reconciliation process. If there is a problem, we find it.
Step 3
Written scope and quote
A fixed monthly fee for ongoing IOLTA work, a separate cleanup fee if the account history needs it, and a start date. Everything on paper before you sign.
Step 4
First reconciliation
Once engaged, the first three-way reconciliation is complete inside 30 days, including any cleanup on the prior periods that came with it.
Why FM
Law firms are the specialty, not a sideline. Most accounting firms have never touched an IOLTA. The people doing your trust reconciliation should know what a client sub-ledger is without having to Google it.
Same schedule, every month. Three-way reconciliation is not "when we have time." It's on the calendar for the same window every month, and it lands there whether the rest of the accounting work is heavy or light.
Bar audit ready by default. When the state bar sends the audit letter (and eventually, in some jurisdictions, they will), the ledgers are already in the format the bar wants, the reconciliations are already documented, and the trail from bank to client is intact.
Trust plus operating plus tax, one team. IOLTA cannot be treated in isolation. What happens in trust affects when income is recognized on the operating side, which affects the firm's tax return. We handle all three so nothing falls between them.
Fixed monthly fee. Trust reconciliation should never be a billable hour surprise. It's part of the monthly engagement.
IOLTA reconciliation, when engaged separately from full bookkeeping, runs $300 to $1,500 per month depending on the number of trust accounts, the volume of client activity, and how clean the starting point is.
When engaged as part of a full law firm bookkeeping engagement, IOLTA reconciliation is included in the monthly fee and typically works out cheaper than pricing it separately.
Cleanup of a trust account that is behind, unreconciled, or has ledger integrity problems is priced separately, one time, before the ongoing work begins.
In most states, yes, if you handle client funds. Participation is either mandatory or effectively required by bar rules. Check your state bar's specific rule (typically Rule 1.15 or equivalent).
No. That is the whole point of the program. The interest goes to the state's legal aid or access-to-justice fund. Earning or keeping IOLTA interest at the firm level is a serious violation.
Most jurisdictions require monthly reconciliation. Some require quarterly. Whatever your state requires is the floor, not the target. Monthly is safer regardless of what the rule technically says.
Something is wrong, and it needs to be found before the next month closes. Common causes: a deposit posted to the wrong client, a disbursement missed on the ledger, a bank fee that hit the account, a check that hasn't cleared. Most of the time it is fixable. Occasionally it reveals a bigger problem that needs to be disclosed.
It needs to be someone who understands trust accounting mechanics. A general small-business bookkeeper usually does not. A CPA firm that specializes in law firms does. Title matters less than trust-specific competence.
The software helps, but it doesn't do the reconciliation. It tracks what the ledgers should say. The bank tracks what the account actually holds. Comparing the two, catching discrepancies, and correcting them is human work.
That happens more often than most attorneys expect. We start with a cleanup engagement to get the account current and the ledgers accurate, then move into the monthly recurring work.
No. FM Accounting is a CPA firm that specializes in serving law firms. We handle the accounting, bookkeeping, and tax side. Legal advice on trust rules in your specific state should come from your state bar or ethics counsel.
We handle those the same way: monthly reconciliation, client ledgers, matter-based tracking. The mechanics are similar, the account type is different.
Get Trust Books That Actually Balance.
A trust account that has not been three-way reconciled in months is a compliance problem that gets worse the longer it sits. Fixing it is a 30-minute call and a written quote.
Book a free discovery call. We will look at the current state of your trust account and tell you exactly what it would take to get it clean.
