I agree it is absolutely commingling. This is what happened for better clairification:

Company A paid 90K to taxpayer from an IRA, reported code 7 distribution, IRA box checked, on 1099r.

Company B paid 50k to taxpayer, reported  code 7 distribution, IRA box not checked on 1099R. Taxable amount in Box  2a was only $60. 

Both amounts were deposited with Company C. According to the agents after discussing it with them further this morning, their notes separated the funds as qualified and non-qualified but when they were given to Company C, they were commingled and all put into the same qualified annuity.

Company C reported on 1099R 9k income, code 7, IRA box checked.

I told the agent they need to get it fixed. They are working on it. I have the taxpayer on extension so they can get this mess fixed.