We have a failed roth conversion. If we inform the IRA provider that the IRS is taking the position that we have a failed conversion, will the IRA provider simply allow the taxpayer to move the assets out of the Roth without issuing a 1099? Do they report anything to the IRS?

It must be handled as a re-characterization and completed by the account owner's tax filing date for the tax year of the original conversion including extensions. The account must have filed timely or received an extension to receive the extended date for the re-characterization. The principal amount of the conversion plus attributed earnings must be moved to a Traditional IRA from the Roth. Earnings are calculated in the same manner as an excess contribution. No cherry picking assets.

It's generally easier if the conversion had been made to a separate Roth IRA then you just move the entire account back to a Traditional IRA. See Pub 590 for further explanation. Here

See pages 30 and 66.

Thanks, jved. The problem is that this conversion took place a few years back, so we're outside any recharacterization window.

Then its treated as a regular Roth excess contribution returned after tax filing. A 6% excise tax is due for each year (File form 5329) and no earnings attributed are removed. In addition, for the year of conversion, there may be a 10% premature distribution penalty ( also form 5329)if the account owner was under 59 1/2. Depending on the state (California?) there may also be a state penalty.

Get thee client to an accountant.