At this point you don't correct anything. Respond to the IRS letter by explaining what you did and why you did it. Include copies of any accounting paperwork, worksheets, PNL statements, and your 1065 tax return, to prove that you already reported the income. Keep copies, use a mailing service with tracking, and be sure to mail it before any deadlines in your current letter. If the IRS accepts your explanation, they will correct your file and you don't need to send in an amended return also, unless they tell you to.
The actual IRS instructions for when you receive a 1099-MISC in error are to not enter it on your tax return at all. Write a letter of explanation, and attach the letter and a copy of the 1099 to your tax return, and file your return by mail. (This is a one page explanation, you would only send additional proof if asked. In your present case you need to send full proof.). The "report the 1099 then report a negative item" trick was created to allow you to e-file--I know it is used on this board a lot, but I don't know who created or endorsed it (a volunteer or a Turbotax Pro). But I have seen enough complaints to know that it does not always work the way people think it will, and the better method is to file by mail with an explanation.
