IRS letter for 2017 unreported 1099-R early 401K withdrawal

[bchoi57]

Hi Is there a tax expert that can help me with my letter from the IRS. They said I did not report $20,030 of my early 401K withdrawal back in 2017, which i looked back and confirmed that it was not included by accident. I guess the 1099-R form didn't get to me by the time I already filed by 2017 tax return. Any way, I know on my 1099-R form, they withheld $4006 for federal taxes. But now I have to pay the 10 % penalty, which is $2,003 based on my federal bracket with the $20,030 in my taxable income. But why does the IRS says I owe $3,109? Shouldn't it just be the 10% which is $2,003? why are they asking for another $1,106?

[dmertz]

Your income tax liability is not determined until you prepare your tax return and the 20% you had withheld for taxes was insufficient to cover the increase in ordinary tax liability caused by your distribution.  20% is simply the minimum tax withholding required by law, not your actual tax liability.  My guess is that this ordinary income falls in the 25% tax bracket of 2017, so your income tax plus early-distribution penalty on the $20,030 distribution would be 35% or about $7,010.  Subtracting from that the $4,006 initially paid via tax withholding toward the additional tax liability gives a tax balance due of about $3,004.  The other $105 is probably interest on the underpayment.