Although your medical expenses may have been paid directly from your HSA, say, by using a debit card associated with the HSA account, these are still distributions from the account that must be reported on your tax return so that you can explicitly indicate the amount that was used for medical expenses. By not entering the 2014 Form 1099-SA reporting the distribution, the IRS has no way of knowing whether or not the money went to medical expenses. Entering a Form 1099-SA results in TurboTax preparing Form 8889 Part II to calculate the amount of the distribution subject to tax and penalty. If you did not enter this Form 1099-SA and your tax return did not include a completed Form 8889 Part II, the IRS assumes that the entire amount was taxable and potentially subject to an early-distribution penalty.
It's possible that all the IRS needs is the completed Form 8889 Part II. However, if the IRS is questioning the accuracy of the amount shown (or will be shown) on Form 8889 line 15, you may need to provide supporting documentation for the medical expenses that were paid. The notice that the IRS sent you should detail how they expect you to respond.
