You should take all your papers from the IRS and from the accident settlement to a CPA or to a tax attorney for review. The settlement from, the accident should set out what is and what is not taxable to you from that award. You don't say when you received the settlement, but it sounds as though that may be at least a part of the error/misunderstanding.
I would suggest you consult with an attorney who specializes in tax law. At the very least consult with a CPA, as this could be a misunderstanding on the part of the IRS. The IRS is usually very reasonable and fair, so if this is their error, they may very well withdraw the claim. If the claim is legitimate, then you may want to consider paying your taxes through a chapter 13 bankruptcy, but that is a subject for a different day. Good luck.
Contact a tax attorney to assist you with this. If it is clearly a mistake you should be able to get some verification from the institution holding your investment to provide the accurate information to the IRS.
Remember that on this forum attorneys try to answer your questions with limited facts available to them. My answer should in no way be considered legal advice. No attorney client relationship has been formed by any answer give here.
The payouts in your portfolio should not be taxed just because they were withdrawn from a portfolio if they were not taxable to begin with. Generally gross income does not include damages for personal injury, worker's compensation or other benefits received as a result of an injury (IRS Sections 104-106). Therefore, these amounts are likely not taxable now. The interest of course is taxable and shows up on a 1099-INT at year's end.
The company who you keep your portfolio with must have misreported this information to the IRS. You should check the "CP" Code at the top right of the Notice against the list in the link below to see how the IRS arrived at its conclusion that you owe this money.
You will need a tax lawyer to explain the error to the IRS, get documentation from the portfolio company, and prepare a detailed letter that documents the issue. The notice should have a response date and may even have a return envelope enclosed. You need to move quickly to preserve your rights.