A friend of mine moved from California to North Carolina in October 2005. Before she moved, she withdrew approximately $32,000 from her retirement fund and taxes were withheld. However, when she filed her income taxes, she didn't think she had to claim it, because she had already paid the taxes. She just received a notice from the IRS that she owes about $6000 in taxes, plus interest, plus a penalty for not filing. What does she need to do? Please Help!! Thanks!!

She needs to file an amended tax return 1040X and claim it. There is no other option.

Actually you don't need to file a 1040X, assuming that the notice the IRS sent is a standard form that allows you to either agree with the assessment or dispute it. If she agrees that she made a mistake, she signs the form, encloses a check, send it off and she's done. If she disputes it, she should indicate that on the form, and enclose a letter of explanation plus supporting documentation. In this case if she has a statement that shows that taxes were withheld at the time of distribution then she should enclose a copy of that. She should have also received a 1099-R form at the end of 2005 which shows both the amount of the distribtion and the taxes withheld. The IRS also received a copy of that form in early 2006, and that's what they're basing they're assessment on. It may be that the amount withheld was insufficient for her income bracket, or it could be that they only withhheld the 10% penalty for early withdrawal, and not any income taxes at all.

Lesson learned - whenever you receive a 1099-R form, you must always declare it on your taxes, because the IRS has that same information.

Again, ebaines has covered all pertinent points.