You have to copy the 1099-R exactly as it is. "for the distribution code I used 3". You can't choose to put a 3 in Box 7 if it is not on the form. If you had, you would not have seen any distribution penalty.
This question, in various forms, has been answered already by numerous people. How much is your income and what form does it take? If it is over the filing requirement you have to pay tax. How much is your social security? How much is your IRA distribution? What other income do you have? What code is actually on the 1099-R?
@Lexifrise
