When you contributed to your 401 K your income on your W-2 was reduced by that amount and you didn't pay taxes on it. Now, because the money was taken out. The IRS wants the taxes. In addition, if you're not 59 1/2 when it comes out, you will pay an additional 10% penalty.
The only thing you could have done is to transfer (roll it over) into an IRA. Unfortunately, that is not an option now.
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