Such a rollover is, by law, not permitted. The inherited IRA was only permitted to be moved to another inherited IRA by nonreportable trustee-to-trustee transfer. Because the funds were distributed to your wife and reported on a code-4 Form 1099-R, the deposit of these funds into another inherited IRA constitutes an excess contribution that is subject to penalty.
The custodian of the receiving account should have disallow making the deposit.
Because this distribution is ineligible for rollover, TurboTax is programmed to disallow reporting such a distribution as having been rolled over. The distribution is taxable and your wife will need to obtain an explicit return of the excess contribution form the IRA that received the deposit.
