Your trust account doesn't balance. You just pulled up the IOLTA reconciliation and the numbers don't match — and now your stomach is in knots. Take a breath. You're not the first managing partner to stare at a trust account discrepancy, and this guide exists to walk you through exactly what to do next, step by step, without making the situation worse.
At Steph's Books, we've helped dozens of law firms resolve trust account discrepancies ranging from simple posting errors to serious compliance violations. Most of the time, the cause is mundane. But you need to treat every discrepancy as serious until you prove otherwise — because your state bar certainly will.
This is the most important instruction in this entire guide. Do not transfer funds, write checks, or make any adjustments to the IOLTA until you've identified the source of the discrepancy. Moving money to "fix" an out-of-balance trust account is how manageable problems become bar complaints.
Here's what to do in the first 30 minutes:
A proper IOLTA reconciliation isn't just "bank balance matches QuickBooks." It's a three-way reconciliation that verifies three numbers agree:
| Balance | Source | What It Represents |
|---|---|---|
| Bank balance (adjusted) | Bank statement minus outstanding checks, plus deposits in transit | What the bank says you have |
| Book balance | Your accounting software trust account register | What your records say you have |
| Client ledger total | Sum of all individual client trust balances | What you owe to each client |
All three numbers must match. If any two match but the third doesn't, that tells you exactly where the problem lives.
Note: If your firm doesn't maintain individual client ledger balances within the trust account, that's a compliance problem on its own. Every dollar in your IOLTA must be traceable to a specific client matter at all times. This isn't optional — it's a Model Rule 1.15 requirement in every jurisdiction.
Not all discrepancies are created equal. Here's what we typically find when we investigate a trust account that doesn't balance, ranked from "easy fix" to "call your bar counsel."
| Cause | Severity | Typical Fix | Time to Resolve |
|---|---|---|---|
| Timing differences (outstanding checks/deposits in transit) | Low | Wait for items to clear; reconcile next statement | 1-5 days |
| Data entry / posting errors | Low | Find the transposed number or misposted entry; correct it | 1-3 hours |
| Deposit posted to wrong client ledger | Medium | Journal entry to move between client sub-accounts | 1-2 hours |
| Bank fees charged to trust account | Medium | Reimburse from operating; switch to fee-free IOLTA | Same day |
| Earned fees not transferred to operating | Medium | Transfer earned fees immediately; document the delay | Same day |
| Commingling (firm funds in trust) | High | Remove firm funds; document the error; review processes | 1-3 days |
| Negative client balance (overdisbursement) | High | Replenish from operating immediately; investigate cause | Same day |
| Unauthorized transactions / theft | Critical | Secure accounts; engage forensic accountant; notify bar | Weeks to months |
Follow this decision tree in order. Each step eliminates a category of causes.
Compare the bank statement ending balance to your book balance. If they differ, list all outstanding checks (checks you wrote that haven't cleared the bank yet) and deposits in transit (deposits you made that don't appear on the statement yet). Subtract outstanding checks and add deposits in transit to the bank balance. Does it match the book balance now?
If yes, your discrepancy is timing-related. Verify the outstanding items clear on the next statement.
If the adjusted bank balance still doesn't match the book balance, look at the difference. Is it divisible by 9? That's the classic sign of a transposition error (e.g., $1,350 entered as $1,530). Search your register for transactions matching the discrepancy amount or half the amount.
Add up every individual client trust balance. Does the total match your book balance? If the client ledger total matches the book but not the bank, the error is between your bank and your records. If the book matches the bank but not the client ledgers, you have a misallocation problem — money is in the right account but assigned to the wrong client.
Check whether any firm operating funds are sitting in the trust account, or whether any earned fees haven't been transferred out. Also check for bank fees — most IOLTA accounts shouldn't have fees, but some banks charge them. If bank fees were deducted, you need to replenish the trust from your operating account immediately.
Run a report showing all client trust balances. Any negative balance means you've disbursed more than that client deposited — which means you used another client's money. This is the definition of commingling, and it must be fixed immediately by transferring funds from operating.
Important: Even if the negative balance was caused by an innocent timing issue (e.g., you disbursed settlement funds before the deposit cleared), the fact that the account was technically short means another client's funds covered the gap. Document the timeline and correct the process.
If you've eliminated all of the above and still can't find the discrepancy, look at every transaction on the bank statement that doesn't appear in your books. Compare check numbers sequentially — are any missing? Look for ACH debits, wire transfers, or debit card charges you didn't authorize. If you find any, read our guide on law firm embezzlement prevention for your next steps.
This is the question that keeps managing partners up at night. Here's the framework:
| Situation | Bar Notification Required? | Recommended Action |
|---|---|---|
| Timing difference resolved within 30 days | No | Document the reconciliation; improve process |
| Data entry error corrected same period | No | Correct the entry; add review step |
| Bank fees charged to trust | Generally no (if replenished promptly) | Reimburse immediately; switch banks if needed |
| Negative client balance (caught and fixed within days) | Depends on jurisdiction | Consult your malpractice carrier; document everything |
| Commingled funds removed promptly | Depends on jurisdiction and amount | Consult ethics counsel; document corrective actions |
| Client funds missing / unauthorized transactions | Yes — immediately | Secure accounts; hire forensic accountant; notify carrier |
| Unable to identify the discrepancy source | Consult ethics counsel | Hire outside help before self-reporting |
The general rule: if client funds were actually at risk or actually lost, report it. If it was a bookkeeping error that was caught and corrected without any client being harmed, most jurisdictions don't require reporting — but check your specific state's rules.
Once you've resolved the immediate crisis, put these controls in place so it never happens again:
Need help cleaning this up? Steph's Books provides specialized law firm bookkeeping with independent monthly IOLTA reconciliation, three-way trust accounting, and cash and accrual reporting. Get an instant quote and stop losing sleep over your trust accounts.
Get a free quote and see how Steph's Books can save you 40-60% vs hiring in-house.
