The IRS does not have to give you credit for cost basis unless you claim it in writing.
You should prepare an amended return to calculate the correct tax. However, don't file it normally. Send the amended return, a check for what you owe (not including penalty and interest) and a letter of explanation, to the office that sent the notice. If you reduce the amount you owe, the penalty and interest should be recalculated accordingly and they will send a revised bill for that.
