Normally the penalty is on the distribution amount. SO if you have taken a distribution of $35000 than the penalty will be $3500.
It is also possible that IRS may have added penalty and interest since the payment is past due.
You do not have to amend if this is the reason of the lower amount that you are referring to.
Let me know if you have any question.
Please note: This advice is provided with the understanding that all the relevant facts have been provided by you. Any change in facts might affect the advice given and hence may not be relied on in such cases. Nothing contained in this reply was intended or written to be used, can be used by any taxpayer, or may be relied upon or used by any taxpayer for the purposes of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code of 1986, as amended.
You can file an amended tax return if you think that will have an effect on your tax liability and provide IRS(office from where you received the notice) with the amended copy. You can also set up payment arrangement. However, the payment arrangement with IRS may be expensive as compared to getting a loan from outside sources. So, you may want to compare the options.