Your Appeal Rights.
How to Launch a Protest Against the IRS Findings

1 You can call the supervisor of the IRS employee who made the findings against you and ask to take a meeting or a telephone conference.
2 Appeal your case to the Appeals Office.
3 You should do something or you are going to get a Formal Notice of Deficiency, but with the deficiency notice you can go to a tax court.
4 If you didn't go to the Tax Court you are going to get a bill for the amount due.
5 If you don't do something about it then you're getting a bill for a penalty. You can appeal that.

6 At this point, it might be a good idea to appeal to the Appeals Office of the IRS.
The good thing here is that the Appeals Office is separate from the office that you are in disagreement with, so they are not adversarial from the word go.
This is a more informal situation, and you can have representation although the IRS says you don't need it. If you want representation, you need to make some arrangements with the IRS about that beforehand.
Most of the time you can take the case to court if you don't get your way at that level.
To learn the specifics of what the IRS has to say about this whole problem and it's solutions download and read IRS Publication 5 .