SEP Withdrawal after Amending Return

[V Test]

I hope this forum works well. It's nice to have a place to get other ideas when you need them. I need some help in how to report a SEP withdrawn in 2006 reported on a 1099-R with a code of 1 (premature withdrawal - no known exception). I picked up the client this year. The SEP was contributed in 2002. In 2006, the same preparer amended the 2002 return because of Rev Proc 2001-17, allowing them to use the foreign earned income exclusion after being evacuated from Pakistan before meeting the exclusion criteria. The income in question was reported on a Schedule C on the original return with a SEP deduction based on that income. On the amended return, the income was changed to wages and taxpayers were instructed to withdraw the SEP contribution. The original contribution amount was $12,500 (taxpayer provided documentation for this), but the SEP deduction was liimited to $10,701. They believe their previous preparer handled everything correctly and they should only have to pay tax on the small amount of income earned on the $12,500 with no penalties. I can't seem to find much on this. Ideas would be greatly appreciated.

[kcjenkins]

What they are overlooking is that since the SEP deduction was $10,701 they did not pay tax on that amount then, so they have to pay tax on that amount as well as the 'earnings' when they take it out. Maybe if you explain it that way they will understand it better.