When Not to Run a University Like a Business

The Globe ran the story on February 8. The university had long made available a certain benefit to employees, which the IRS considered taxable. So the value of the benefit would show as income on employees' W-2 forms. So far, nothing unusual. Through some combination of changes in tax regulations and changes in the benefit program, the benefit ceased to be taxable in the eyes of the IRS in 2009. But Harvard, mistakenly, continued report its value as income on employees' W-2s. Unfortunate, and costly to employees, because they had to pay taxes on what should have been nontaxable benefits. And now they have to amend their returns, perhaps several years of returns, if they want to get their money back from Uncle Sam.

So far this is a straight business story. The tax code is a labyrinth and it changes all the time, and somebody made a mistake. It was a kind of mistake that probably happens all the time in corporate America, though institutions that are trying to help their employees (or increase their competitiveness inhering and retention) by offering benefits may be more likely to make mistakes like this than organizations that offer the minimum. In any case, it's a shame, and somebody should get scolded for it, or worse--maybe not even someone within the University, could be an outside contractor or consultant on these technical matters. Just like in a normal business.

The place where Harvard shouldn't have acted like a normal business but did is in how it handled the affected employees. Its initial response was to send a letter to affected employees on January 21, 2014 -- about three months after the error was discovered. I have not seen the letter, only the reaction it drew from Harvard Law School professors Alvin Warren and Daniel Halperin. Here is their characterization of Harvard's letter.

The letter misstates the law.  It says that "IRS regulations do not allow the University to assist you in filing for a state or federal income tax refund."  There is no such regulation.  

The letter does not accurately present the scope of the problem.  It says that "For many people, the amount of the over-reported income was less that $200 per year."  That is true, but for some employees, the amount exceeds $10,000.  Nowhere is the total scope of the problem frankly presented.  We were told in our meeting that more than 11,000 current and former employees are affected, with the total amount of overreported income exceeding $20,000,000.  In our judgment, to mention in the letter only those employees for whom the amount involved is less than $200 per year is misleading as to the true extent of the problem. 

The letter fails to reveal all of the years for which there is a problem.  The letter only discusses 2011-13, but the overreporting also occurred in 2009 and 2010.  This fact is obscured by the vague expression in the first paragraph, which states that the problem involves "several years prior to 2014."  The full scope of the years involved is never disclosed.  The federal statute of limitations has run for 2009, so no refund can be claimed for that year unless an employee's tax return is still open due to, for example, an audit.  The federal statute of limitations for 2010 runs on April 15, 2014, but the administration does not believe it can provide corrected W-2 forms by then. 

Most grievously, the letter fails to accept Harvard's responsibility to make its employees whole for its monumental error.   Although 11,000 Harvard employees were victims of the administration's error, the only remedy presented in the letter is for each of the victims to file amended tax returns with the state and federal governments.  The only "resources" offered in the "Frequently Asked Questions" that accompanied the letter are a couple of links to federal (not state) government tax sites. 

The Globe reports that the University has agreed to do as the professors suggest, so things seem to be back on the right t