It sounds like the audit itself has happened and now the fight it or pay it decision needs to be made. I can’t say exactly what questions to ask but I’d start with looking over the documentation to get a feel for what the IRS is basing its assessment on. Once I have that in mind then I start asking questions about what the client believes happened. Was this a lack of documentation, disagreement as to tax treatment, refusal to cooperate so the IRS just denied the deductions. What did the IRS ask for, what did you say, and what information did you provide. The client will obviously say the IRS were jerks and they gave the IRS everything. Really developing the who, what, when, where and why is everything.
You probably want to really get comfortable with what happened first and that should help illuminate what you do next. Honestly, as for reaching out to the IRS, never hurts to reach out to the IRS as you never know what will be said. You may find some ability to negotiate the items so some agreed upon solution can be hammered out. Then your clients can focus on how to pay it.
Eric I think said something about extensions of assessment that he never agrees to them unless the extension can be limited in scope if he thinks the client just needs time to gather documents or other support. Again, a lot depends on the issues in the audit and the client’s ability to refute the IRS assessment.