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Back to the OP's question. I would respond to the notice with a letter and a Form 5329, showing on lines 1-2 the amount of early distribution, and the amount that qualified as deductible medical expenses. Enter Code 5 on the current year form; I think it was the same in 2009.

(The amount is limited to the amount deductible; you don't have to itemize but if you did, maybe attach a copy of Schedule A.)

Since you're sending it separately you should sign the 5329.

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