IOLTA FAQS – How do we handle client over payments?

This blog post outlines the right and wrong ways to manage such overpayments, detailing why depositing the full amount into an IOLTA account is the most compliant and cleanest option for handling overpayments.

Written by

Paul W Carlson, CPA

Published on

Aug 5, 2018

Handling client overpayments accurately is a critical aspect of law firm financial management, especially when it comes to trust accounting. It may seem like a simple gesture of goodwill when a client rounds off an invoice, but incorrect depositing of these overpaid amounts can create compliance issues and muddle your financial records.

Client received a $1,560 invoice from your law firm. Client decided to round off the amount and mailed a check for $2,000.

Options for depositing the $2,000 check.

Deposit the full $2,000 to the operating account. Incorrect. The $2,000 check includes $440 of funds the firm has not earned. Unearned funds are never deposited to the operating account.
Split the deposit via banker voodoo. $1,560 is deposited to operating and $440 is deposited to IOLTA. The state trust accounting guides advise against this process. While the funds to end up in the correct bank account, the audit trail is messy.
Deposit the full $2,000 to the IOLTA account, wait for funds to clear, and transfer $1,560 from IOLTA to the operating account. Correct.

If your law firm does not have an IOLTA account, return the payment to the client and request a payment for $1,560. Or quickly open an IOLTA account.

Law Firm Operations

Paul W Carlson, CPA