Pay attention to your statute of limitations (runs from return dates or the dates the tax is paid). I assume you are familiar with these rules as a preparer.
The proposed amendments by the IRS do not have to be accepted. They can and likely should be challenged just as you say (with an amended return if applicable, but otherwise just the supporting documentation for the originally filed tax return). IRS notices come with instructions for response and carry a special address for filing in the case of an amended return where the taxpayer is under audit.
If need be, you could potentially take this all the way to court. You first challenge, appeal within your time frames, etc. (I am not attuned to the specifics of your case in terms of dates, notices, etc.).
Your goal is to provide the correct documentation (noting the IRS substantiation requirements for ordinary and necessary business expenses, which I also assume you are familiar with as a preparer). No taxpayer should be made to unfairly pay tax, especially in a situation where they are going BK and have a medical condition as you begin to suggest, so definitely fight this tooth and nail. Find receipts, invoices, bank statements, credit card statements, ... everything you can get your hands on.
If you feel you are in over your head, or if you are not comfortable with the audit, appeals, liens / seizure of property, and court processes associated with an IRS audit, you should perhaps back down from the engagement. Again, I'm not attuned to the specifics. You said you got the pamphlets from the IRS, so I won't reproduce anything here unless you request it (in which case I would be happy to).
Thank you for your question.