Your assumption is correct. A withdrawal from a 401K is taxable income and should have been included as such. Remember when you set up a 401K taxes are not withheld from your paycheck until it comes time to withdraw at retirement. Early withdrawal is a killer tax and penalty-wise.

No question that it was included as taxable income...so far so good however, my concern was in regard to the Earned Income Credit which only applies to EARNED INCOMES ( Wages, Salaries, Tips, and other employees pay, Net earnings from self employment, Gross Income received as Statutory Employees and Disability Income until retirement age ) asper Publication 596.
The Income receive from 401 K Early Withdrawal IS NOT CONSIDERED EARNED INCOME anywhere within Publication 596.
In claiming the EIC in my return I only used my Earned Income from W2 Wages only, then the corresponding amount under my filing status in The EIC tables entered in Form 1040 Line 64A,
My question is: Was I suppose to consider the Unearned Income from the 1099R in Form 1040 line 16B (Pensions and annuities) to figure out the corresponding EIC amount to be claimed ?
As you know the more Income decrease the amount of EIC, and the Worksheet to establish the correct amount of Earned Income (Form 1040 Line 64A instructions) does not considers Pension fund early withdrawal as such.

Did you receive your refund via direct deposit? If so, rest assured, the IRS will be sending a letter explaining any correction made to account for the reduced refund amount.

I'm thinking your AGI may simply be too high, which would include your distribution. Go to chapter 1 and check your AGI on your return against the limits shown for your filing/marital status. http://www.irs.gov/pub/irs-pdf/p596.pdf

I already checked and rechecked to no avail....as you say: just wait for an explanation from the IRS or I can call Cost. Service to find out what happened.
Thanks.

Yes, if you call the IRS at 1-800-829-1040, and they should be able to tell you what the issue with your EIC claim is.

If your AGI is below the limits shown, the only other issue that comes to mind is this: Were you claiming any children that are not related to you, or who may have been claimed by another taxpayer in prior years?

The IRS has been getting into the habit of checking the residency and relationship of children claimed for the EIC that may appear not to be related to the taxpayer. If that's the case, along with the letter of explanation they may be requesting documentation and proof that the children are related and did live with you for more than half the year.

If your AGI is over about $15,000, then the EITC is calculated based on two numbers --
your earned income and your total income.
The amount you receive is the lesser of the two.

The worksheet given on page 49 of the instructions for form 1040 will work you through this.