My husband took an early withdraw from his 401K for personal reasons, they took only 10% taxes off before we received it, we claimed it on our 2005 tax return as income from the 1099R and paid an additional 10% tax, now we receive a notice telling us we should have paid an additional 10%? Also, is this correct? Is this considered the penalty for an early withdraw?:confused: :rolleyes:

If you take an early withdrawal from a 401(k) you owe income taxes on the full amount of the distribution (remember, you didn't pay taxes on the money when you first earned it, so now Uncle Sam is getting his due), PLUS a 10% penalty for taking an early withdrawal (assuming no hardship case existed at the time). So when the administrator took out 10% my guess is that this represents the penalty. Then they sent you a 1099-R, which should have indicated the 10% penalty that was already withheld - did it? You then reported the income that was listed on the 1099-R with your taxes, right? If the admin neglected to list the fact that they withheld some money on the 1099-R, the IRS has no way of knowing that it was. In that case in your response back to the IRS tell them what happened, and give them copies of whatever statements or proof you have that shows that the penalty was withheld. Hope this helps!