It doesn't work that way, it might make sense if the 20% they withheld isn't counted as tax paid (a credit ) but it does.
In other words, it doesn't matter what was withheld, the penalty tax is 10% of the distribution.
Whether nothing was withheld or 50% was withheld, makes no difference, there is still a 10% penalty tax.
That amount is added as tax due.
NOW when the program is ready to do the math, the tax withheld will be considered.
Example, say you put 5,000 down and order a 50,000 car.
When the car comes in, it still costs you 50,000. The 5,000 will be subtracted so you owe only the difference.
Say you put 5,000 on a 50,000 car and order a tow package worth 5,000. You can't say, "Well I already paid 5,000 so the tow package should be free."
What was withheld will be a credit to what you owe.
The disbursement will have a 10% tax levy.
That tax will be added to your tax liability.
The tax withheld will be added to taxes paid.
That will be subtracted from your tax liability.
I hope this makes more sense to you now.
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