In this article, we are breaking down the top five IOLTA mistakes we have seen in law firm books over the years. These are the kinds of issues that can quietly turn into compliance problems if no one is watching closely. These are not theoretical examples or textbook errors. They are real patterns we have uncovered while reviewing and cleaning up law firm financials, often for firms that were already doing a lot right.
 

When it comes to trust accounting, even good systems can fall out of balance when multiple settlements hit at once, several people touch the same files, or the firm’s three-way IOLTA reconciliation is not being maintained consistently. Each of these five issues has the potential to affect compliance, distort reporting, or create downstream headaches for your CPA. This usually happens not because of negligence, but because the process around it was not designed to catch it.

Let’s walk through what these mistakes look like, why they happen, and how proper bookkeeping keeps your trust account, your operating account, and your three-way reconciliation aligned month after month.

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1. Misallocating Multi-Source Settlement Deposits

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This first mistake happens when a case has more than one payer, such as an insurance company, a defendant, or even a county or municipality contributing to the same settlement. Most staff are used to a single payment hitting the IOLTA: one deposit and one disbursement. But when multiple payments arrive for the same matter, things get complicated quickly.
 

What often happens is that only the first deposit makes it into the disbursement sheet. The other incoming payments, sometimes tens or hundreds of thousands of dollars, never make it into the client’s distribution summary. The client gets less than they are owed, and the firm’s own fee might be understated.
 

On the surface, the IOLTA balance might still look fine. But during the next three-way reconciliation, the numbers stop matching. The trust ledger shows funds unaccounted for, and the financial trail breaks down.
 

The fix is procedural. Strong, consistent collaboration between case management, accounting, and bookkeeping is essential. Practice management software and bookkeeping software must communicate clearly. That way, when multiple checks or wires arrive days apart, nothing is missed in the final disbursement. In multi-source settlements, accuracy is not just about compliance. It is about ensuring your client receives every dollar that belongs to them.

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2. Not Recording Advanced Costs as Reimbursable Assets

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This one is surprisingly common. A firm pays filing fees, deposition costs, or expert-witness retainers out of operating funds, but instead of recording them as advances to be reimbursed, they post them directly as expenses.
 

It may not seem serious until tax season or client billing begins and the numbers stop lining up. If the costs are not tracked as reimbursable assets, the firm loses visibility into what it is owed, and the income statement no longer reflects true profitability.
 

It is not about inflating profit; it is about accuracy. When those advances are reimbursed from client trust funds or settlement proceeds, they should clear from the balance sheet, not show up as new income. Think of these advances as mini loans to your clients.
 

Firms that treat these advances correctly can immediately see what is recoverable, what is outstanding, and what is actually spent. These transactions belong on your client ledger.
 

In audit situations, financial institutions and underwriters require these costs to appear on the balance sheet anyway. Getting ahead of that expectation strengthens your firm’s accounting operations long before any review takes place.
 

3. Duplicate or Miswritten Checks to Vendors or Clients
 

This mistake looks harmless until it creates hours of tracing. A firm finalizes several settlements at once, reuses old check templates, or rushes to meet deadlines. Somewhere in the process, a matter name gets copied incorrectly onto multiple check memos. The vendor receives the correct payments, but several checks reference the same matter instead of being split among the right clients.
 

The vendor gets paid, and the trust account might still balance in a one-way reconciliation, so it appears fine. But one client’s ledger goes negative, showing funds disbursed that were not theirs, while another client’s ledger still shows a positive balance. When the next three-way reconciliation happens, it falls apart. The ledgers do not align, and the firm is forced to retrace every check and deposit to locate the discrepancy.
 

This is not about intent. It is about procedure. Every trust check should list the correct client or matter name, and that detail should match both the firm’s practice management system and accounting software.
 

That single habit saves hours of cleanup, keeps ledgers accurate, and ensures that when reconciliation happens, every dollar lands exactly where it belongs.
 

4. Pulling Fees Before They Are Earned
 

This issue can happen in both directions. Some firms wait too long to pull fees, while others pull too early. When client settlements hit the trust account, the attorney’s portion is not earned until the matter is fully settled and all disbursements are approved by the client. Pulling fees too early, before lien resolutions or client sign-off, can look like premature income recognition.
 

On the other side, waiting too long to pull earned fees leaves client ledgers showing inflated liabilities. It creates confusion for both the state bar and the bookkeeper when reviewing the account later.
 

The key is clear documentation. Once the disbursement sheet is approved and all third-party payments are confirmed, fees are considered earned and can safely move from IOLTA to operating. It is not about speed. It is about timing. When timing matches documentation, every transfer stands on solid ground.
 

5. Depositing Client Funds Into the Wrong Account
 

This last one is the most preventable and the most stressful. A client asks where to send a retainer, or a large settlement check arrives, and a staff member accidentally deposits it into the operating account instead of the IOLTA.
 

There is no bad intent, just bad routing. But the moment it happens, client funds are commingled with firm funds, and that is a compliance problem. Even if corrected quickly, the paper trail becomes questionable and can raise concerns with the state bar.
 

This usually happens when procedures are unclear. A client uses outdated wire instructions. A new employee does not know which account to use. Or someone assumes all deposits go to the same place.
 

The safeguard is structure. Incoming funds should be verified by matter and account type before any deposit happens. Every staff member who handles funds should have written instructions for what belongs in IOLTA, what belongs in operating, and what requires attorney approval.
 

Once deposited, record it immediately, tag it to the right client ledger, and confirm it during the next reconciliation. Experienced bookkeepers can often recognize patterns such as typical retainer amounts or the cadence of reups and act as an extra layer of review to prevent a week of troubleshooting later. That layer separates a secure trust process from a risky one.
 

The Root Cause: Process Without Structure
 

Every one of these IOLTA mistakes, from misallocations to misdirected deposits, traces back to the same issue: process without structure.

When your firm has clear processes to keep every client ledger aligned with your trust bank balance and accounting records, compliance becomes second nature.
 

The three-way IOLTA reconciliation is not just an administrative task. It is the backbone of trust accounting integrity. The client ledger, the book balance, and the bank statement should always agree. When they do, you can prove your firm’s diligence at any moment.

At Chief Bookkeeping Officer, we help law firms build exactly that: trust accounting discipline that supports growth, reduces risk, and protects your reputation.
 

Good bookkeeping is not just about spotting mistakes after they happen. It is about building systems that make them nearly impossible in the first place.