I am not sure what you thought was incomplete. The steps are all right there.
In answer to your question 1, here is what do you need to do:
First, you need to contact the IRS at the number on your Notice - use(NNN) NNN-NNNN You won't be able to contact them until the government starts back up, as the IRS, like the rest of the Federal government, is shut down. When you talk to them, tell them everything you have said here.
Next, write down what you have said here. Fax it to the IRS at(NNN) NNN-NNNN This will get someone working on it as soon as the IRS opens for business again.
As I said, it will take more than a few days to get this resolved. The IRS moves very slowly. So, if they have not sent you a letter indicating resolution by the end of November, then file a Tax Court petition. This is just a step to buy you more time. With the evidence you have, filing the petition should get someone at the IRS' chief counsel's office to dismiss the case and abate the tax, penalties and interest.
I have attached a Tax Court petition from my last client that was similar to your case. You can copy it almost word-for-word, just changing your personal information. I already changed the numbers to match your case.
Your second question - how hard is it to file a Tax Court Petition, and how much would a tax attorney charge?
The Petition is easy. I have attached a copy of one for you to use as a template. A tax attorney would charge you $1000 - $2500 to do this. You can easily do it yourself!
In answer to your Question #3, yes, once the 1099 question is resolved, they will recalculate your balance due based on the investment income and send you a new letter. Your tax should only be a couple hundred dollars, if that.
In answer to your Question #4, what if it goes to Tax Court? It won't go to Tax Court. The IRS does not like to lose in Tax Court. It costs them time, money and resources that it does not have. When they have a case that they can't win, as in your situation, they try to settle it. In most cases, it does not even go to court. Someone in Appeals looks at it prior to the Court looking at it. The people in Appeals are not the normal IRS agent. These people have intelligence, understand the tax laws, and have the power to make deals. So, once Appeals gets it, the matter will go away quickly.
I hope this has answered your question. I believe this time I did, question by question. I also attached your Petition, which should help!
Thanks again! Have a great weekend!