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Ugh.

Can the taxpayer declare bankruptcy? Such would preserve the IRA.

The withdrawal from the IRA is added to your ordinary income.

If this pushes you into a higher bracket, the amount of income above the bracket level is taxed at the higher bracket rate.

The bracket levels depend on your filing status. I'll assume "single" since you didn't mention any family for our taxpayer.
The brackets currently are:
10% up to $7,300
then 15% up to $29,700
then 25% up to $71,950
then 28% up to $150,150
then 33% up to $326,450
then 35% on rest of income

Situation 1
Say you have $10,000 in your rollover IRA. You withdraw, 20% is withheld. You get $8000 (the $2000 goes straight to the IRS). When you go to settle your taxes, you owe $1000 penalty; your standard deduction ($4850) and personal exemption ($3100) reduce your taxable income to $2050 so your total tax is $1205. You get a $795 refund.

Situation 2
Say you have $100,000 in your rollover IRA. You withdraw, 20% is withheld. You get $80,000; $20,000 goes to the IRS. When you go to settle your taxes, your taxable income starts at $100,000; your standard deduction and personal exemption reduce your taxable income to $92,050. you find your total tax is $10,000 + $20,281 = $30,281. You owe $10,281 -- way too much -- so you get hit with underpayment penalties. If you want to avoid this situation you make estimated quarterly payments during the year.
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