On Linux, this runs as expected:
$ echo -e \"line1\\r\\nline2\"|awk -v RS=\"\\r\\n\" \'/^line/ {print \"awk: \"$0}\'
awk: line1
awk: line2
I just checked with Arnold Robbins (the provider of gawk) and the answer is that it's something done by the C libraries and to stop it happening you should set the awk BINMODE variable to 3:
$ echo -e "line1\r\nline2" | awk '1' | cat -v
line1
line2
$ echo -e "line1\r\nline2" | awk -v BINMODE=3 '1' | cat -v
line1^M
line2
See the man page for more info if interested.