taxes 401k rollovers

What is the name of your state? Alabama
My mother-in-law,(age 62) took her 401k of 94,000, and put it in an IRA last year. Later that month she took 50,000 out of the IRA and paid her house off. She paid 5,000 in federal taxes at the time of the withdrawal, now she is being told by her taxprep. that she has to pay an additional 6,100 in penalties. How is this possible? Wouldn't someone have to tell her about this penalty thing before she took the money? Or, is the way the government makes sure by the time you are 65 that you won't have any money and will have to keep working?

I think that there is a misunderstanding about the word "penalties." Since MIL is 62, there would be no penalty for the IRA distribution.

However, the entire distribution is taxable income. Now, what rate that will be taxed at depends upon a bunch of factors that you don't mention -- filing status, other taxable income, deductions, etc.

But, consider this. For someone filing single (your post seems to imply that would be MIL's filing status), the 25% bracket begins at taxable income of $29,050 for 2004. Your MIL only had taxes withheld from the distribution at a rate of 10%. That she would owe additional taxes, and possibly a penalty for underwithholding, makes sense.

Don't blame the government or "someone." Neither knows all the details of your MIL's tax situation. At some point, MIL has to ask questions and understand the tax consequences of her actions.