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I know those expenditures should not be taxable, but I cannot determine where is the mistake.

It sounds like you forgot to report the distribution (and your qualified expenses) on Form 8889. If that's the case prepare one now and send it with your response to the notice.

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.

The 1099 reports distributions; the 5498 contributions.

See Pub 969.

For general reference, the quickest way to resolve most "what do I do with this?" questions about 1099's is to turn them over and read the back. Second line of defense is early on in the 1040 instructions, which includes several pages on information documents (by number) and what to do with them.

Rule Your Retirement Home Fool
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