TurboTax ONLY pays interest and penalties if it was a *calculation* software error, not if it was caused by a user data input error. The 1099-R interview has changed very little over the past several years. The only software error that I am aware of is the unique situation of an inherited IRA with a basis and that was corrected with an update.
From your description, if you received two 1099-R's with a code 1 in box 7 then one of them should have been issued by the 401(k) plan. If that was placed in a bank IRA account within 60 days of the 401(k) distribution then you should have told TurboTax that this was a non-taxable rollover. Under this circumstance you are allowed to enter a zero into box 2a (taxable amount - the TurboTax help tells you that) and indicated in the interview that the distribution was rolled into another retirement account. That would have placed the box 1 amount on 1040 line 15a and zero taxable amount of zero on line 15b with the word "ROLLOVER" next to it.
If that is not what was on the 1040 then you made a data entry error and you did not properly report it as a non-taxable rollover. The IRS should be able to remedy this with a phone call to the number on the letter. They might ask you to amend that return to report it properly. This is not covered by the accuracy guarantee.
Only the distribution from the new IRA should be taxable.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
