Umpire Damien Dumusois questioned the effort of Kyrgios, telling him at one stage early in the second set he was "really borderline", which upset the world No 38 who then continued to verbal the official.
Kyrgios then smashed an ace and turned to Dumusois to sarcastically ask "was that borderline poor?" and was rebuked.
However, during the second set, Kyrgios wasted a golden chance on serve when he was down 4-5, and Klahn pushed the match to a deciding set.
Dumusois' comments, which appeared to suggest a lack of effort, prompted Kyrgios to respond: "I don't care. you have no right to tell me that it's poor".More news: How to be a better friend to someone with mental health issues
And he was for all of 30 minutes before unravelling and going down to a 4-6, 6-4, 6-3 defeat by Bradley Klahn, the world No 104 from the United States.
"He needs to do like any other player needs to go through in order to be successful".
Nick Kyrgios left the court, phone in hand.
As a result, he was given $US10,000 for unsportsmanlike conduct.
Woodbridge felt it was a pity that Kyrgios couldn't skip Shanghai - a compulsory Masters Series event - given it was the third successive year in which the Australian had gone out of the tournament in controversial fashion.More news: Kevin Tway Wins First PGA Tour Event
In 2016, he copped a $16,500 fine following a straight sets to Germany's Mischa Zverev.
Kyrgios has a chequered history at the Shanghai Masters after quitting mid-match against Steve Johnson in the first round previous year and being accused of tanking in a second-round loss to Mischa Zverev in 2016.
Kyrgios has recently lost his status as Australia's No 1 to Alex de Minaur.
This most recent Shanghai meltdown comes after Swedish umpire Mohamed Lahyani was suspended for giving the Aussie a mid-match pep talk in his second-round US Open win.
Wawrinka, who is trying to discover his form following knee surgery, took the opener 6-4 but 13th seed Coric roared back and won his 32nd match of the season.More news: Pipeline explosion near Prince George
Another American, Frances Tiafoe, was less fortunate.
- Here's where Ireland ranks among the world's most powerful passports
- Risks to global financial system rise
- Democrats to force health care vote Wednesday in Senate
- Tropical Storm Michael could form late Sunday, hit the USA midweek
- Trouble for Hubble: gyro fails on space telescope
- White House: More talks with Saudi crown prince
- Dow ends brutal session with 3.2% loss, Nasdaq -4.1%
- Google drops out of Pentagon's $10 billion cloud competition
- Pogba should have kept views to himself - Saha
- Sears is preparing for bankruptcy as soon as this weekend