Kyrgios was fined after he stormed off mid-way through his first-round exit in the event past year, while in 2016 he argued with spectators and was accused of giving away points in another defeat.
But a sloppy service game down 4-5 cost Kyrgios the set and he unravelled from there amidst a stretch of five lost games.
Klahn eventually wrapped up the match in one hour and 17 minutes, winning 4-6 6-4 6-3.
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.
Speaking in Shanghai, where Federer is the top seed and reigning champion, the 37-year-old Swiss great called Kyrgios "a great player". "I don't want to talk about that any more".
Later Kyrgios said to Dumusois: "You know I literally could just go to the ATP office after this and say I felt put down from your comment and you'd be in trouble, right?"
Kyrgios has a chequered history at the Shanghai Masters after quitting mid-match against Steve Johnson in the first round a year ago and being accused of tanking in a second-round loss to Mischa Zverev in 2016.
Only through understanding work ethic and scheduling, creating the right team around himself, only then can you unlock the potential really..
Shanghai is not the only scene of a Kyrgios controversy.
"But there is still a process in place".
The Swede climbing down from his chair in NY to have a lengthy chat with Kyrgios when he was showing little effort as he trailed by a set and 3-0 down against Pierre-Hugues Herbert.
"I want to help you", chair umpire Mohamed Lahyani told Kyrgios, who went on to capture 19 of the next 25 games and set up a clash against Federer in NY.
Woodbridge suggested that Kyrgios was probably running on empty, which made him look disinterested and that he should look to manage his schedule better next year and concentrate on the Grand Slam and elite tour events.
"When he's fresh we don't see him "leave the court" so to speak where his eyes wander; when he's playing fresh he's got the opponents in his sights".