If I have an early withdrawal from an IRA of 12000 but had 2000 held for taxes shouldn't the early withdrawal amount be 10000? Why should I be taxed on the penalty?

Nope....it works just like your W-2.

The tax withholding is just a prepaid estimate of what might be assessed on the full amount when you enter your 1099-R into your tax return.  The 12000 income will be added to all your other income, and the tax that is assessed for the extra income will be either more...or less than the 2000 withheld.  The 2000 already withheld, is added to all your other tax withholding as a credit against the total taxes that will be on your final tax return for that year.   IF you total income for the year is low, you may get some of the $2000 refunded.

(Whether an additional 10% penalty ends up being added to it depends on your age at withdrawal....which tax year it was withdrawn for.....and whether any penalty exceptions apply.  But that is determined as you fill out your tax return.)