caffeyw, yours seems to be a rollover of a traditional IRA to another traditional IRA and it appears that it was reported correctly on your tax return.
Did you mail your tax return rather than e-file? If so, the data transcriber at the IRS probably failed to transcribe the ROLLOVER notation causing the automated checking system to flag the distribution as a taxable distribution that was not rolled over but not reported as taxable. If this is what happened, it can be an effort to convince the IRS that the error was on their end.
Another reason that the IRS system might have flagged unreported income is if the receiving custodian treated the movement of the funds as a non-reportable trustee-to-trustee transfer while the original custodian treated it as a reportable distribution and rollover. Such circumstances would result in the receiving custodian not issuing a Form 5498 reporting receipt of a rollover contribution. If it was a trustee-to-trustee transfer, the original custodian should not have issued any Form 1099-R.
A third reason that the IRS might flag it is if the rollover was from a traditional IRA to a qualified retirement plan. Such rollovers require explanation to the IRS because qualified retirement plans have no way to report receipt of rollovers. As in the case where an original IRA custodian treats it as a distribution but a receiving IRA custodian treats it as a non-reportable trustee transfer, the IRS can treat the distribution as not rolled over if they have received nothing to substantiate that the rollover was completed.
