Sometimes the path of least resistance yields the greatest tax savings, even when wrong.  Report as income a mythical distribution, then report a loss for the same amount, spread over several years so the taxpayer doesn't dip into a lower bracket?  What can go wrong? With any luck, it might keep their AGI at a point where EIC is maximized, or Medicare premiums are not increased.  

I had a case where I argued a $45,000 loss as co-signer on a job-connected loan was ordinary rather than capital. It would have saved my clients $5,000 in one year.  I lost, and instead $3,000 a year saved them $1,000, fifteen times.  Better than an annuity.  

In this case, though, we're back to playing "trick the IRS computer."  One way to freeze the CP2000 process is with an amended return before the document matching starts.  Leave the $7,000 off the original return, then amend it with reference to the incorrect 1099-R but adding, say, $200 for potential recovery.  (What kind of bankruptcy was it?  Chapter 11, with company surviving reorganization?  Is there litigation by other shareholders that might reach a settlement with directors, officers and promoters?)

Of course the risk then is that IRS thinks it can bypass deficiency procedures when processing a balance-due amended return.  For me, there's less risk to sending a client down the street, than to signing a return under penalty of perjury that I know is wrong.