How do I report pension income paid for restitution?

She should receive a 1099-R for the pension which is reported as income.  There are no tax deductions for federal restitution.

She did receive a 1099-R and taxes were taken out.  Is there an exemption for early withdrawal to pay this?

Yes, unfortunately, she will probably have to pay the penalty because it does not fit into an exception.  Was she forced to get the money from the pension?

It was her decision to take her pension and apply it towards the restitution.