This is an issue that the IRS occasionally has problems with during the processing of original tax returns -- when a taxpayer submits multiple
Schedules C and/or Schedules F, and when at least one of the schedules has a
positive amount and others have a negative amount that can offset the gain
reported on the other schedule.
It's probably simply an IRS error, but you should reply back
telling them your situation, highlighting that the loss offsets the gain, and
completing the Schedule SE that they're asking for. If you don't, they might assess tax on the
amount that they believe is your
self-employment income.
