Working with an accountant that specializes in accounting and tax for law firms can take away a lot of your headaches.
1. Do you find yourself explaining how your trust (IOLTA) account works to your accountant every year at tax time?
As you know, trust accounts are intended to hold deposits until the fees are earned. All accountants know the concept of recognizing revenue when it is earned, but most do not understand there may be large balances sitting in there for recognition at a later point in time.
2. Does your trust/IOLTA checking account have a corresponding liability account with a balance equal to the checking account?
This may be a little too much accounting, but the basic premise is that since the money in the trust checking account is not technically yours since it is not earned, it should have a liability that nets the two to zero on your balance sheet.
Why does this matter? Because when these are out of balance it means your revenue is also wrong. This can have SERIOUS tax consequences. The last person you want knocking on your door about not reporting all of your revenue is the IRS. You also don’t want to pay any more taxes than you have it. Most accountants do not understand how these two accounts work
together. Most (really all) of the financials we review that come from law firms with general accountants have issues in this area.
3. Do you have a three-way reconciliation done on your trust account at least monthly?
Some states require it, others do not…either way it is a really good idea to have this done to keep you out of hot water with the bar.
4. Do you know when your client retainers are getting low?
This could have a very negative effect on your cash flow. Studies also show the longer people take to pay, the less likely they are to pay. You should receive a statement from your accountant at least twice a month showing the retainer balances for each client. This will allow you to collect additional funds before they run out. Your main goal is to get paid BEFORE you do the work. You also know maintaining a retainer removes the risk that you will have unpaid fees.