Running a law firm comes with many challenges, especially when it comes to managing money. While many firms hire bookkeepers mainly for tax filing, having accurate financial records is important for more than just taxes. As a CFO with many years of financial experience, I’ve seen how problems related to taxes can have a negative impact on a firm’s finances. In this blog, I’ll talk about common financial mistakes law firms make and how to avoid them.

Trust Accounting (Interest on Lawyers Trust Accounts or IOLTA):

Trust accounting is very important for managing client funds.. If transfers from IOLTA to the operating account are not handled correctly, it can lead to wrong revenue reporting. This can lead to lead to issues with the state bar and cause tax problems.

Payroll Expenses:

It’s important to record payroll expenses correctly for accurate financial reports. Many firms make the mistake of recording the net pay instead of the gross pay on their profit and loss statements. This mistake can result in inaccurate financials and cause compliance issues.

Advanced Client Costs:

The IRS has specific rules for advanced client costs, but many firms ignore them. These costs should be shown as assets on the balance sheet until they are reimbursed by the client. Not following these rules can lead to incorrect expense reporting and tax issues.

Revenue Recognition:

Some firms delay billings or trust transfers to change how revenue is recognized. However, the IRS requires that revenue be recognized in the period it was earned, regardless of when billing happens. Not following these rules can lead to fines and tax liabilities.


These are just a few common financial mistakes law firms make that can have big effects on taxes and overall financial health. By focusing on accurate financial reporting and getting advice from experienced accounting professionals, firms can reduce these risks and concentrate on serving their clients effectively.

Remember, investing in proper financial management is not just about following tax laws—it’s about ensuring the long-term success of your firm. Don’t wait until tax season to deal with these issues. Start using best practices now to avoid future problems and keep your firm financially stable.