I received an audit from the IRS saying that my taxable income was increased by 3,995. for an IRA distribution. I opened and closed the IRA in the same tax year 2006. I never deducted any of the contribution, why Do I have to pay tax on income that I already paid?

The reason is you made a premature distribution of an IRA! Even though you did not deduct the IRA contribution from your 2006 tax return, the contribution amount has been reported to the IRA.

I suggest you contact a CPA and have him respond to the this IRS notice, and if necessary have him file an amended tax return to claim the IRA contribution that you omitted and then show the premature distribution in the same amended 2006 tax return. I think you will find that you will owe considerably less in taxes, as the IRA contribution deduction will save you taxes.

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