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So it has been sitting at IRS since October? The idea would be to avoid the issuance of a Notice of Deficiency so that a trip to Tax Court is not needed. (A Low-Income Taxpayer Clinic could probably help with that, though.)
The best argument, it seems to me, was that there was no distribution to the taxpayer. The bank should not have issued the 1099-R, once advised that it was beguiled by a criminal.
You can try to get the CP-2000 exam to the Service Center's "Independent (don't laugh) Office of Appeals," but my experience is that such requests are ignored. Likewise, asking for help from the Taxpayer (don't laugh) "Advocate" will probably go nowhere because they'll say they don't get involved in audits.
There's an interesting discussion of a similar case from 2008. The name of the poster looks familiar, she might still be around if anyone recognizes it. The message thread gets bogged down in an irrelevant discussion of what "basis" means for an IRA, but look at the comments by Koss.
