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I have received a notice from the IRS regarding my 2010 taxes and I am trying to determine where I went wrong. Any insight is appreciated.

I received 1099-SA from my HSA bank. Box 1 is $2,625.17 and box 3 distribution code is 1. The IRS notice I received says that I failed to report $2,625.17 in income.

I did not receive a direct distribution from my HSA in 2010 (or any year). That actually is the amount spent on health care in 2010. Since the account is on Quicken I can print the report from that year to show my 2010 expenditures were $2,625.17.

I know those expenditures should not be taxable, but I cannot determine where is the mistake. Did the bank send the wrong form or the wrong distribution code? I switched banks in 2011 and I noticed the new bank sent a form 5498-SA, which does not reference distributions.
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