IOLTA stands for Interest on Lawyer Trust Accounts. When a Wisconsin law firm holds client funds that are too small or expected to be held too briefly to earn meaningful interest for the individual client, those funds go into a pooled IOLTA account at an approved financial institution. The interest earned on the pooled balance goes to the Wisconsin Trust Account Foundation (WisTAF), which funds legal aid programs across the state. Larger amounts or funds held for longer periods go into separate individual client trust accounts where the interest belongs to that client.

The most important rule is never commingling. Client funds and firm operating funds must stay completely separate at all times. You cannot deposit earned fees into the trust account, and you cannot use trust funds for firm expenses. The only firm money that belongs in a trust account is a small amount to cover bank service charges, and even that has strict limits. Depositing a retainer directly into your operating account instead of trust is a violation. Those funds belong to the client until you earn them, at which point you transfer the earned portion out of trust and into your operating account.

Record-keeping is where firms either stay out of trouble or create serious problems. You need individual client-matter ledgers that track every deposit, every disbursement, and the running balance for each client and each matter. Every dollar sitting in the trust account must be traceable to a specific client at all times. If your total trust account balance doesn’t match the sum of all your individual client-matter ledger balances, something is wrong and needs to be identified immediately.

Monthly three-way reconciliation is required. You reconcile three things against each other: the bank statement balance, your book balance for the trust account, and the combined total of all individual client-matter ledger balances. All three numbers must match. This is not something you can put off until quarter-end or catch up on later. Discrepancies need to be found and corrected right away. The Office of Lawyer Regulation takes trust account violations seriously, and a sloppy reconciliation process is one of the most common paths to disciplinary action.

Common mistakes go beyond just commingling. Firms frequently fail to move earned fees out of trust promptly, which leaves you holding money that is no longer client funds. Others don’t maintain detailed enough client-matter records and end up with unexplained balances they can’t attribute to any specific client. Both of these create risk during an audit or random compliance review.

IOLTA bookkeeping requires a level of precision that goes beyond standard small business accounting. Your books need to track not just the trust account as a whole but each client’s share within it, with every transaction documented and explained. This is one of the reasons professional services firms like law practices benefit from working with a bookkeeper who understands the specific requirements. Standard categorization and reconciliation won’t cut it when every dollar has to be tied to a client and a matter.

If you are running a Wisconsin law firm and your trust accounting feels uncertain or you have fallen behind on reconciliations, getting help sooner is always better than later. Our Beaver Dam accounting services team works with law firms and other professional service businesses to keep these records clean, current, and compliant so you can focus on practicing law instead of worrying about your next trust account reconciliation.