How do I handle bank fees on my IOLTA account?
Bank fees on IOLTA accounts require special handling because the money in the account belongs to your clients, not to you. California State Bar rules prohibit using client funds to pay bank fees or any other expenses related to maintaining the trust account. Getting this wrong can lead to disciplinary action, even if the amounts are small.
When your bank charges a fee against the IOLTA account, you need to deposit your own funds to cover that fee immediately. The fee reduces the account balance, and since every dollar in the account should match what you’re holding for specific clients, any reduction creates a shortfall. That shortfall must come from your firm’s operating funds, not from client money.
From a bookkeeping perspective, record the bank fee as a firm operating expense in your general books, not as a reduction in client trust funds. The deposit you make to cover the fee gets recorded in the trust account as an owner contribution that immediately offsets the fee. This keeps your client ledgers accurate and maintains the required balance for each matter. A small business accountant in San Gabriel Valley who works with attorneys can help you set this up correctly from the start.
If you’re using QuickBooks alongside practice management software like Clio, make sure your chart of accounts separates trust account activity from operating account activity. Proper law firm trust accounting setup ensures the bank fee hits your operating expenses even though it was physically charged to the trust account. The deposit to cover it bridges the two systems.
Some banks offer IOLTA accounts with waived or reduced fees, especially for smaller balances. The State Bar of California maintains a list of approved IOLTA banks, and some offer fee-free accounts specifically designed for attorneys. Switching banks can eliminate this issue entirely.
The mistake to avoid is simply recording the bank fee as a deduction from the trust account and moving on. This leaves you short on client funds, which is a compliance violation. Even $10 or $15 per month adds up, and if your trust account ever gets audited, unexplained shortfalls raise red flags that auditors will investigate.
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