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I am very sorry to learn of this matter. You need an experienced tax attorney right away.
By stating that she paid $350,000.00 for the property (when she did not), your daughter made it appear that you were hiding income from the IRS. This creates a huge amount of trouble for you, and given how long ago this transaction took place you are going to need help to unravel it.
You can find local tax attorneys using the State and local Bar Association directories, or private directories such as www.AVVO.com; www.FindLaw.com; or www.Martindale.com (I personally find www.AVVO.com to be the most user friendly).
I do know that customers do not come to this site to be told "go hire an attorney" - but when you are in a situation where the IRS claims you failed to report over a quarter of a million in taxes, you really do need a lawyer to help you. Find a tax specialist and have them help get this matter resolved. (Your daughter is going to have to figure out her own taxes as well - but her problem is less pressing.