I actually have been having a few issues myself and got the nod from admin Matt, the tone match guru, that it's working properly and it's us missing the mark. He told me that our signal is very important.
Check utility, and then status and see where your sounds are coming in. Adjusting mine to be right on those lines has helped a little. I think the biggest issue with TM is...the better your source file, the better your outcome.
I've had a few guys come to me that I just couldn't help. Lo fi sounds fail pretty bad. You tube sounds at low bit rates don't fair well either. A few good examples...
Dream Theater album that they included multi-tracks with....can't remember the name, but I copped the Rite of Passage tone so scary spot on, it was nuts.
Anything Van Halen taken from CD works incredible.
I've done really well with several 80's hero's as long as I've had a really good source file to take from. Dokken/Lynch, Vai, Nuno, Bratta, Randy Rhoads, Jake E...you get the idea.
Some, I've failed on. But just about always, I had source files that were not as good as the ones I did above. The quality of the source file seems to be the key. I just did a Ty Tabor tone the other day that rocked my world. He's not easy to cop, let me tell you.
Whatever the case, try for great source files. Even if it's someone you don't really want to cop, try to cop it just to see if the source file makes any difference.
Rick, the difference in mine compared to yours is, where you have 3.5...mine is set all the way up to peak. Next, we are not supposed to have the drive block turned on. I have everything off when I tone match other than the amp. So my drive block and even the tone match block are turned off.
From there, before I play any of the source/reference file into the axe fx, I turn the reference on and off (X start so it reads nothing in there to clear out anything I may have done before.) Then I play my source file on loop in my DAW making sure there are no pops or clicks and then I start X. I may let it play for 20 seconds or so.
From there, I press Y to clear out anything in local and then off/on. I then play the first chord of the song I'm copping, and turn on Y and play the section for about 15 seconds followed by a series of chromatic type chords that I saw Cliff doing in one of his early TM videos.
When I'm done, I then turn on my TM block and press ENTER on my panel screen in my Axe Fx. I never use the Axe Edit buttons for this because I don't seem to hear the tone change nor do I see "communicating" on the screen.
When I press enter on the axe front panel, I hear it change and see "communicating" in Axe Edit. So I've just always done it that way.
Not sure any of this will help, but it's worth a try to see if you fair any better. Good luck, man.