In that case, it properly reports a nontaxable distribution of the after-tax funds (and because it's nontaxable, it is also not subject to any early-distribution penalty). The IRS should not be claiming otherwise.
It was required to be reported on your tax return with the $10k included on Form 1040 line 5a but excluded from line 5b. If you did not include it, that might have triggered an examination and the examiner incorrectly believed that the distribution was taxable.
