I receive stuff like this from the IRS about twice a year.  It takes me about 2 days to get the records I need to state my case and then I send it in.  While it is unfair of them to consume my time like this, every single time I've had this type of problem and come back to them with a explanation they have agreed with me and dismissed the claim for additional money.  If you keep good records and organize it in a logical and methodical manner you should be OK.  If you come at them like an obnoxious asshole, they can make life very difficult for you and you'll be spending a lot of time sending correspondence back and forth.  The "mistake" was probably made by a computer on  a fishing expedition.  These notices are sent out automatically and no human will probably see your case until your polite response is considered and received.  I would explain your case to them in a polite but firm manner and you will most likely see the matter resolved in your favor, at least that's been my experience every single time.