I changed companies in '05 and withdrew from my 401K to use as a down payment on a new home. The total amount in my 401K was $56K, however I had a $15.8K loan that was in repayment. The 1099-R form I received then was for $36.5K with $7,294.61 Fed Tax withheld (the Total Distribution box was also checked). Now, 2 years later, I receive a 1099-R form for the remaining $15.8K with no federal tax withheld and I'm on the hook for the taxes and penalties. Is there any reason I wasn't taxed for the entire amount in '05? Would it benefit me to amend my tax return in '05 and have the 1099-R corrected for this years return? It seems as though my former company has made the error in not reporting my entire amount in '05 and I'm paying for it now!

When you default on a loan form your 401(k) there is no tax withheld, because when they had originally sent you the loan amount there was no tax due. It was only after you defaulted on the loan (when you left the company) that it was reclassified as an early withdrawal rather than a loan. So yes, you do owe ordinary income tax plus the 10% penalty on the original loan amount.

I don't know why this wasn't resolved back in '05. My suggestion would be to include this on your 2007 return, and add a note to the return that says "Early withdrawal of 401(k) in 2005."