IOLTA Trust Account Compliance for Law Firms | 2025 Guide

Updated November 2025 with state-specific guidance, practice-type workflows, and monthly compliance routines

IOLTA trust accounting isn't complicated. It's just unforgiving.

The rules are clear. The math is basic. The process is repetitive. But one mistake - one transfer made too early, one reconciliation skipped, one balance that doesn't tie out - and you're explaining yourself to the bar.

That's not fear-mongering. It's just the reality of holding other people's money.

The good news: if you understand what IOLTA compliance actually requires and build a simple monthly routine around it, you'll never worry about audits. Your trust account becomes a non-issue. A box you check, not a threat hanging over your practice.

This guide covers exactly what you need to know - and what you need to do—to manage your IOLTA trust account correctly.

What an IOLTA Trust Account Actually Is

An IOLTA account is a pooled trust account that holds client funds too small or short-term to earn interest for the individual client. Instead, the interest goes to your state's IOLTA program, which funds legal aid and access-to-justice initiatives.

What it holds:

• Retainers (until earned)

• Settlement funds (until disbursed)

• Filing fees and costs (until paid out)

• Any client funds you're holding temporarily

What it doesn't hold:

• Your operating funds

• Earned fees

• Personal money

• Funds large enough or held long enough to earn interest for the client (those go in a separate client trust account)

How it works: You deposit client funds into the IOLTA account. You track every dollar by client using individual client ledgers. When you earn fees or need to disburse funds, you transfer them out. The interest generated goes to your state bar's IOLTA program - you never touch it.

The concept is simple. The execution is where firms get it wrong. For a foundational overview, see our complete IOLTA account guide. For broader context on trust accounting beyond IOLTA, see our trust accounting guide.

Warning Signs You're Already Out of Compliance

Before diving into requirements, here's a quick diagnostic. If any of these apply to your firm, your IOLTA account needs immediate attention:

□ You haven't reconciled in 60+ days Monthly reconciliation isn't optional. If you're behind, you're non-compliant.

□ You're not sure which client each dollar belongs to Every dollar in your trust account must be traceable to a specific client matter. "It's in there somewhere" isn't good enough.

□ You have trust balances for matters that closed months ago Stale balances signal poor management and can trigger audits. Funds should be disbursed or returned promptly after matters close.

□ You've never done a three-way reconciliation If you're only matching your bank statement to your ledger, you're missing the third leg. More on this below.

□ You transfer funds "when it feels right" rather than when earned Timing matters. Transfer too early and you've converted client funds. Transfer too late and you have cash flow problems.

□ Your bookkeeper doesn't understand trust accounting Generic bookkeepers often treat trust accounts like operating accounts. They're not. The rules are different and the stakes are higher.

If you checked even one box, keep reading carefully.

The 5 IOLTA Compliance Requirements That Actually Matter

Every state bar has pages of trust accounting rules. But compliance really comes down to five core requirements. Get these right and you'll pass any audit.

1. Separate Trust Account at an Approved Institution

Your IOLTA account must be:

• Completely separate from your operating account

• Held at a financial institution approved by your state bar's IOLTA program

• Properly titled (usually "[Firm Name] IOLTA Account" or "Client Trust Account")

This isn't negotiable. You cannot hold client funds in your operating account "temporarily." You cannot use a bank that isn't IOLTA-approved. You cannot commingle funds for any reason.

State-specific note: IOLTA requirements vary by jurisdiction. California requires quarterly reporting. New York requires IOLA-participating banks. Texas requires annual compliance certificates. Florida requires the account to be at a Florida-based institution. Always verify your state bar's specific IOLTA program requirements.

2. Individual Client Ledgers for Every Matter

You don't need a separate bank account for each client. But you absolutely need a separate ledger.

Every client matter with funds in trust must have its own ledger showing:

• All deposits

• All disbursements

• Running balance

• Transaction dates and descriptions

At any moment, you should be able to answer: "How much of this trust account belongs to Client X for Matter Y?" If you can't, you're not compliant.

3. Monthly Three-Way Reconciliation

This is the gold standard - and the most commonly skipped requirement.

Three-way reconciliation means matching three numbers:

1. Bank statement balance (what the bank says you have)

2. Trust ledger balance (what your books say you have)

3. Sum of all client ledger balances (what you're holding for each client)

All three must match. If they don't, something is wrong—and you need to find it before your state bar does.

Some states only require quarterly reconciliation. Do it monthly anyway. Problems are easier to find when you're looking at 30 days of transactions instead of 90.

4. No Commingling (With Clear Examples)

Commingling means mixing client funds with firm funds. It's one of the most common trust accounting violations and one of the easiest to commit accidentally.

Examples of commingling:

• Depositing a client retainer into your operating account

• Leaving earned fees in the trust account "until you need them"

• Using trust funds to cover a short-term firm expense (even if you plan to replace it)

• Depositing a check that includes both client funds and earned fees into one account

The rule is absolute: Client funds go in trust. Firm funds go in operating. Never mix them, not even temporarily, not even by accident.

5. Proper Timing of Fund Transfers

You can only move money out of trust when:

• Fees are actually earned (work completed, not just billed)

• Costs are actually incurred (not anticipated)

• Client authorizes disbursement

• Funds are being returned to client

Transferring fees before they're earned is conversion of client funds - even if the client "won't mind" or you "know you'll do the work." The timing must match the earning.

Common timing mistakes:

• Transferring a flat fee to operating when you receive it (it's not earned until work is complete)

• Moving funds based on when you send an invoice rather than when you complete work

• Disbursing settlement funds before the check clears

How to Set Up Your IOLTA Account Correctly

If you're starting fresh or need to fix a broken setup, here's the process:

Step 1: Open the Account

Contact a bank approved by your state bar's IOLTA program. Tell them you need to open an IOLTA trust account. They'll know what this means and will set up proper reporting.

Choose a bank that:

• Is on your state bar's approved list

• Provides detailed monthly statements

• Offers online access for transaction monitoring

• Understands legal trust accounting requirements

Step 2: Configure Your Chart of Accounts

In QuickBooks Online (or your accounting software), set up:

• A dedicated trust liability account (this is what you owe clients)

• Individual sub-accounts or ledgers for each client matter

• Clear separation from all operating accounts

Your chart of accounts should make trust funds impossible to confuse with operating funds.

Step 3: Set Up Client Ledgers

Every matter that will have funds in trust needs its own ledger. When you open a new matter:

• Create the client ledger

• Link it to your trust liability account

• Use consistent naming conventions

This creates the audit trail that proves every dollar is accounted for.

Step 4: Establish Your Reconciliation Workflow

Decide now:

• Who performs the monthly reconciliation

• What day of the month it happens

• Where documentation is stored

• Who reviews the completed reconciliation

Write it down. Make it a recurring calendar item. Don't leave it to memory.

Step 5: Assign Responsibility

Someone must own trust accounting. For solo practitioners, that's you (or your bookkeeper). For small firms, designate a specific person -usually a bookkeeper, paralegal, or office manager with proper training.

This person should understand trust accounting rules, not just general bookkeeping. Generic bookkeeping knowledge isn't enough.

For the complete monthly financial workflow that includes trust accounting, see our guide to accounting for law firms.

Trust Accounting Software That Actually Works

The software matters less than the configuration. We've seen firms with excellent software fail audits because their trust accounts weren't set up correctly. The tool doesn't save you - the setup does.

That said, here's what we recommend:

Clio Manage + QuickBooks Online We're a Clio Certified Partner. This is our most common setup for law firms. Clio handles practice management and trust tracking; QBO handles the accounting. Properly integrated, it supports three-way reconciliation and clean audit trails.

MyCase + QuickBooks Online We're a MyCase Partner. Strong for firms that want robust client communication features alongside trust tracking. Same integration approach as Clio.

LeanLaw + QuickBooks Online Best for firms wanting detailed profitability tracking alongside trust management. The trust accounting features are solid and built for legal.

What to avoid:

• Generic QuickBooks without legal-specific configuration

• Any software that doesn't support three-way reconciliation reports

• Spreadsheets for anything beyond the simplest solo practice

The right setup depends on your firm size, practice type, and workflow preferences. But all of these options can be configured for full IOLTA compliance. Proper law firm bookkeeping is the foundation of compliant trust accounting.

The Monthly IOLTA Compliance Routine

Here's exactly what to do each month to stay compliant. This assumes you're using legal practice management software integrated with QuickBooks Online. Tracking your cash runway - one of the essential law firm financial metrics - becomes much easier when your trust accounting is accurate.

Week 1: Transaction Review

Time required: 15-30 minutes

• Review all trust account deposits from the previous month

• Verify each deposit is coded to the correct client ledger

• Review all disbursements and verify proper authorization

• Flag any transactions that look wrong or unfamiliar

What you're looking for: Errors, miscoded transactions, unauthorized transfers, anything that doesn't belong.

Week 2: Client Ledger Cleanup

Time required: 20-40 minutes

• Review client ledger balances

• Identify any negative balances (these should never exist)

• Flag stale balances (matters closed but funds remaining)

• Initiate return or disbursement of stale funds

What you're looking for: Balances that shouldn't be there, either because they're negative (compliance violation) or because they should have been disbursed already.

End of Month: Three-Way Reconciliation

Time required: 30-60 minutes (longer if you find discrepancies)

1. Get your bank statement balance (as of the last day of the month)

2. Calculate your trust ledger balance (your books' record of the trust account)

3. Sum all individual client ledger balances (what you're holding for each client)

4. Compare all three numbers - they must match exactly

5. If they don't match:

   • Check for outstanding deposits or checks

   • Look for bank fees you haven't recorded

   • Review for miscoded transactions

   • Find the error before moving on

6. Document everything:

   • Save the bank statement

   • Print/save the reconciliation report

   • Print/save the client ledger summary

   • Note any discrepancies found and how they were resolved

7. Store documentation in a consistent location (cloud folder, practice management system, wherever you'll find it during an audit)

Ongoing: As Transactions Occur

• Record deposits the day they're made

• Record disbursements the day they're made

• Never let transactions pile up for "later"

The monthly routine is cleanup and verification. But accurate real-time recording is what makes the monthly routine manageable. For a detailed walkthrough of the trust accounting workflow, see our trust accounting workflow guide.

IOLTA Management by Practice Type

Your trust accounting workflow depends on how your firm operates.

Solo Practitioners

Key challenges:

• You're doing everything yourself (or with minimal support)

• No internal oversight to catch errors

• Limited time for administrative tasks

Recommended approach:

• Block 2 hours at the end of each month for reconciliation

• Use software that automates as much as possible (Clio or MyCase + QBO)

• Consider outsourcing to a legal-specialized bookkeeper for monthly reconciliation

• Keep your client ledger list short - disburse and close completed matters promptly

Time investment: 2-3 hours/month if you're doing it yourself. Less if you outsource.

Biggest risk: Falling behind on reconciliation because "you'll get to it later." You won't. Put it on the calendar.

Small Firms (2-5 Attorneys)

Key challenges:

• Multiple attorneys creating trust transactions

• Need for oversight and internal controls

• Delegation without abdication

Recommended approach:

• Designate one person (bookkeeper, paralegal, office manager) to own trust accounting

• Require that person to complete monthly reconciliation by the 10th of the following month

• Have a partner review and sign off on the reconciliation

• Create written procedures so the process doesn't live in one person's head

Time investment: 3-5 hours/month for the person doing reconciliation. 30 minutes for partner review.

Biggest risk: Assuming someone is handling it without verification. "I thought you were doing that" is how firms end up with 6 months of unreconciled trust accounts.

Contingency Practices (Personal Injury, Class Action)

Key challenges:

• Large settlement amounts create higher stakes

• Multiple disbursements per settlement (client, medical liens, attorneys)

• Longer gaps between trust activity (months between settlements)

Recommended approach:

• Reconcile monthly even during quiet periods

• Create a settlement disbursement checklist to ensure nothing is missed

• Document lien payoffs and get written confirmation

• Be meticulous about timing - don't disburse until settlement checks fully clear

Time investment: 3-4 hours/month during active periods. 1-2 hours during quiet months.

Biggest risk: Settlement disbursement errors. One missed lien or premature disbursement can create massive liability. Use a checklist every time.

The 6 IOLTA Mistakes That Trigger Bar Complaints

These aren't theoretical. These are the mistakes that lead to audits, grievances, and disciplinary action.

1. Transferring Funds Before Earned

You receive a $5,000 retainer. You transfer it to operating immediately because "you know you'll do the work."

That's conversion of client funds. The fee isn't earned until the work is done. The money stays in trust until then.

The fix: Only transfer when work is completed. Match the transfer to the work performed, not the invoice sent.

2. Depositing Retainers in Operating Account

A new client sends a retainer check. You deposit it into your operating account because "it's basically earned anyway."

That's commingling from the first moment. Retainers go into trust - always.

The fix: Every retainer goes into trust. No exceptions. Transfer to operating only when earned.

3. Missing Third-Party Disbursements

You settle a personal injury case for $50,000. You disburse the client's share and your fee, but you forget to pay the $3,000 medical lien from the trust account.

Now you've either got client funds sitting in trust indefinitely (stale balance) or you paid the lien from operating (commingling).

The fix: Create a settlement disbursement checklist. Every payee gets listed before you disburse anything. Verify the trust balance hits zero when disbursement is complete.

4. Negative Client Ledger Balances

You transfer $2,000 to operating for Client A, but Client A only had $1,800 in their ledger. The $200 difference came from Client B's funds.

You just used one client's money to pay yourself for another client's work. That's a serious violation.

The fix: Never disburse more than a client ledger balance. If your software allows negative balances, configure it to flag or prevent them.

5. Stale Trust Balances

A matter closed eight months ago. There's still $400 sitting in the client ledger. You keep meaning to return it but haven't gotten around to it.

Stale balances signal poor management and can trigger audits. In some states, old balances must be escheated to the state.

The fix: Review client ledgers monthly. When matters close, disburse or return funds within 30 days. Don't let balances sit.

6. Payment Processing Fee Errors

A client pays a $3,000 retainer by credit card. The processor takes a $90 fee, so $2,910 lands in trust.

But you record $3,000 in the client ledger. Now your ledger doesn't match your bank - and you're showing $90 you don't have.

The fix: Record what actually hits the trust account, not what the client paid. Either absorb processing fees as a firm expense or charge them to the client transparently (check your state's ethics rules on this).

What Happens When You Get IOLTA Wrong

Most trust accounting problems don't end in disbarment. But they do end in stress, expense, and reputational risk. If you're behind on reconciliation or facing an audit, our trust account cleanup service can get you back to compliance quickly.

The typical progression:

1. Random audit or client complaint: Your state bar selects your trust account for audit, or a client complains about fund handling.

2. Document request: You're asked to produce trust records, reconciliations, and client ledgers. If you haven't been reconciling, this is where panic sets in.

3. Discrepancy investigation: Auditors find something that doesn't match. You have to explain it. "I don't know" is not an acceptable answer.

4. Outcome determination: Ranges from "no action needed" to private reprimand, public reprimand, suspension, or disbarment. Most issues result in reprimand plus required remediation.

How to protect yourself:

• Reconcile monthly (documented)

• Keep records for 5-7 years (check your state's requirement)

• Respond promptly and completely to any bar inquiry

• If you find an error, fix it immediately and document what you did

The attorneys who get in serious trouble usually didn't intend to do anything wrong. They just didn't have systems, fell behind, and then tried to hide problems instead of fixing them.

Good systems make IOLTA a non-issue. That's the goal.

When to Get Help with IOLTA Compliance

Handle it yourself if:

• You're a solo with low trust volume

• You're detail-oriented and can commit time monthly

• You've been properly trained on trust accounting

Get help if:

• You're behind on reconciliation

• You've never done a three-way reconciliation

• You've received a bar inquiry or audit notice

• Your bookkeeper doesn't understand legal trust accounting

• You'd rather spend time practicing law than reconciling accounts

We specialize in bookkeeping for law firms - including IOLTA trust account management, monthly three-way reconciliation, and audit-ready documentation. We're a Clio Certified Partner and MyCase Partner, and we work exclusively with QuickBooks Online.

If your trust accounting needs attention, let's talk.

Frequently Asked Questions

• What is an IOLTA trust account?

  An IOLTA (Interest on Lawyer Trust Account) is a pooled bank account that holds client funds too small or short-term to earn interest for the individual client. The interest goes to your state's IOLTA program to fund legal aid services. You use it to hold retainers, settlement funds, and filing costs until those funds are earned or disbursed.

• How often should I reconcile my IOLTA account?

  Monthly. Some states require only quarterly reconciliation, but monthly is the standard for good trust accounting practice. Problems are easier to find in 30 days of transactions than 90. Monthly reconciliation also keeps you audit-ready at all times.

• What is three-way reconciliation?

  Three-way reconciliation means matching three numbers: your bank statement balance, your trust ledger balance, and the sum of all individual client ledger balances. All three must match exactly. If they don't, something is wrong with your records and needs to be corrected.

• Can I deposit retainers directly into my operating account?

  No. Retainers must be deposited into your trust account and only transferred to operating when earned—meaning when you've completed the work. Depositing retainers into operating is commingling, which is a violation of professional conduct rules in every jurisdiction.

• What happens if my client ledger goes negative?

  A negative client ledger balance means you've disbursed more than that client had in trust. The difference came from another client's funds, which is a serious violation. Your software should be configured to prevent or flag negative balances. If you find one, correct it immediately and document how it happened and how you fixed it.

• What's the difference between an IOLTA account and a client trust account?

  IOLTA accounts hold pooled client funds that are too small or short-term to earn interest for individual clients. A separate client trust account holds funds for a specific client when those funds are large enough and held long enough to generate meaningful interest for that client. Most routine retainers and costs go into IOLTA; large settlement holds or significant client funds might go into individual interest-bearing accounts.

• How long should I keep IOLTA records?

  Most state bars require 5-7 years, but check your jurisdiction's specific requirement. For a complete breakdown of what to keep and how to organize it, see our guide to IOLTA recordkeeping requirements. Keep bank statements, reconciliation reports, client ledgers, and documentation of all transactions. Store them in a consistent location where you can access them quickly if audited.

• My bookkeeper doesn't understand trust accounting. Is that a problem?

  Yes. Trust accounting has specific rules that differ from general bookkeeping—especially around timing of transfers, three-way reconciliation, and compliance documentation. A bookkeeper who treats your trust account like an operating account will create compliance problems. Either train them specifically on legal trust accounting or work with a bookkeeper who specializes in law firms.