PayPal didn't really do anything wrong. Although they are REQUIRED to file it for 200 transactions, they can file it for any amount. They also have no idea what is personal and what is business, so they properly recorded all transactions.
Respond to the IRS notice telling them exactly what you said here; it was personal transactions. They may ask for proof. Print out the log and show what each transaction was for. Just make sure that you did report any business transactions on your tax return.
