I was experiencing a similar situation today. The steps that I went through were the following and might be of help to you:
1) Does the reports tab in VS work for the project in question (yes)
2) Delete the TFS cache from the app data and let the tool generate it again (no effect)
3) I have the source so I debugged it a little and confirmed that the bad report server value was coming from TFS and not from the tool. (confirmed)
4) Confirm that the link is set up correctly on the TFS server with the TFS administration tool. (yes)
5) Check the SSRS configuration manager to make sure that the URLs are registered correctly there.
This last step is where I found my problem. In my case it was that we had updated the SSL certs and somehow the report server became decoupled from the new cert. It still worked if you went to the URL, but TFS must have checked the registration
because it said it was invalid and returned the app tier url and not the SSRS url.
Hopefully one of those steps will point you at your problem!