"they said they will not be sending out a 1099 because it was not reported to the IRA."
That statement makes no sense.
If whenever funds are moved from a traditional account to a Roth account, they are required to issue a Form 1099-R unless the amount is less that $10. As VolvoGirl suggests, the financial institution holding the traditional IRA might have believed that they were doing a nonreportable trustee-to-trustee transfer of the traditional IRA to another traditional IRA, but somehow the funds got impermissibly diverted to a Roth IRA (or the financial institution holding the traditional IRA simply misdirected the funds).
