Deposits and accounts – or everything you didn’t know about managing lawyers’ accounts
A beginner attorney knows that “ignorance of the law does not exempt from the accompanying punishment”, therefore in life in general and in the management of accounting books in general, the above sentence becomes valid.
One of the common problems that self-employed people get into trouble with the tax authorities is the lack of knowledge of the law regarding the proper management of accounting books; When in most cases the mistakes happen in good faith and as a result of not knowing the special instructions that apply to the attorney during his practice.
In this article we will focus on the uniqueness of the lawyer’s business activity, with a detailed reference to the way in which he should produce invoices and receipts correctly.
Current conduct:
In light of the lawyers’ unique occupation, during which they receive deposits from clients, collect from their clients expense reimbursements for various fees and payments, manage bank accounts for their clients and perform various actions on their behalf, the Israeli legislator found a different way to treat the management of their account books.
While most of the independents’ income consists of collecting payment for the services and goods they provide, lawyers have additional receipts, for example:
Receiving a deposit – the attorney has the right to receive a deposit from the client, which is deposited with the attorney for the shift or alternatively in a bank account opened specifically for this purpose, an account in trust.
This operation is mainly common in real estate sales transactions, receiving guarantees and collateral for transactions, the deposit trust account may have deposit and withdrawal movements as detailed below.
Client expenses – in the course of his work, the attorney pays various fees for his clients, such as: registration fees and various levies as part of the legal process he performs.
The practice is that the attorney’s fees do not include these fees,
Rather, the attorney pays out of his own pocket, and then settles with the client for these expenses.
This is the place to emphasize that the customer’s expenses are divided into expenses that include VAT and those that do not include VAT.
This division is of great importance, because recording the payment of a fee, for example, as an expense with VAT, will oblige the attorney to pay full VAT on this reimbursement of expenses, an amount that can amount to thousands of shekels.
Fees \ notary fees – payment for the fees, where notary fees are an additional classification in the lawyer’s fees, but in his case it is income from a business for all intents and purposes.
Management of “customer book”
Similar to his colleagues in the liberal professions, the attorney is required to maintain a client book in which all debits and credits relating to that client must be recorded, such as: fee payments, refreshments and taxis and more.
This is how it happens that while most of the independents will transfer only tax invoices to the tax advisor / CPA as a rule, the attorney has the duty, which is also a right as will be clarified later, to also transfer receipts that he has produced to his clients.
If so, why is it a right?
The obligation imposed by the income tax on the self-employed, in fact requires them to keep a careful record, at the end of which the self-employed person also gets paid from this obligation, because this obligation helps them know exactly how much to collect from their clients, and in fact it is likely that they would have done so even without the guidance of the tax authority.
Deposits or not to be….
In light of the fact that a lawyer may manage his clients’ funds in trust accounts, the working assumption of the tax authorities is that all funds constitute income in the hands of the lawyer until proven otherwise, and therefore the lawyer has the duty to take extra care in managing these accounts, in order to avoid inflating income on the part of One and exposure to disciplinary ethics problems on the other.
This caution can be expressed by taking the following measures:
- Complete separation between the customer’s trust account and the private account.
- Printing a statement of accounts of the accounts in which deposits were made during the current year and transferring them to the tax consultant / CPA for the purpose of adjusting the books during the closing of the annual report.
- Saving and filing of every operation performed on these accounts in two different places, a client file for example and in the accounting binder found with the tax / CPA consultant.
- Mandatory account management and right for any trust account as part of the bank account system.
In conclusion:
In light of the above, it can be understood that correct and accurate registration combined with proper guidance and follow-up by your tax advisor and CPA can save you a lot of money, time and unnecessary explanations with the tax authorities.