I contributed $5,500 to a traditional IRA during tax year 2014. My accountant did not take the traditional IRA deduction, apparently I was not eligible for it. My new accountant is telling me to convert that 2014 contribution into a ROTH-IRA, but my custodian is telling me that I will have to pay income on that conversion. However, I did not take any benefit on the initial deduction during 2014. Can someone provide any insight on my options?
Money in an IRA that has both deductible and non-deductible contributions in it is called mixed basis. Any withdrawal - including a conversion - must be taken proportionally from each category (after the tax year it's contributed, anyway).
So if you have $55,000 in your IRA, of which $5,500 was contributed non-deductible and $49,500 was contributed as deductible or earnings since, you would then need to pay tax on 90% of any Roth conversion - regardless of how much you're converting.
Search terms for this topic are "Isolating IRA Basis", such as this article.
In your case, you likely would have $5500 on line 5, unless you made other nondeductible contributions to your IRA.
You custodian is telling you that you may have to pay income tax on that conversion.
You need to attach form 8606 to your tax return to calculate that. If you have other balance in your IRA that you did get deduction for, you may need to prorate.