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Nathan, we had the same issue.
We put html code <br> at then of lines in our Notes field so it would maintain the paragraphs. In Smart Reporting edit the field and set the format to HTML formatter.
Thank you T.D.! I also had to uncheck 'Remove HTML Tags' when editing the field. I am glad there is a solution, I just wish Smart Reporting handled this a little more gracefully without having to add html tags in text fields. This will create issues for us in other reporting instances but again, really appreciate the info!
Glad it worked for you. Can you please mark your question as answered - this may help others.