SOLVED: I contacted Facebook from within our Commerce account and told them about the problem we are having. About 4 business days later, someone got back to me and said that our instagram shop needed to be UNLINKED (by them) in order to get it to point to the custom domain, not the myshopify domain. I had to write back and give them permission to unlink it. 2 days after that, I got an email saying our shop has been successfully unlinked and that I could now reapply for an instagram store (our Facebook Store remains unchanged as we were having no problem with it tagging products). I logged out of Instagram and logged back in and saw the “ADD SHOP” button appear on our profile. I hit it and set up the shop and this time it ASKED to confirm the custom domain I wanted to add, which was finally the correct one. Now I am waiting for Instagram to approve our new shop. Once approved, we will be able to tag our products as the URLS now match.
I hope this helps someone because I was going bananas trying to figure this out!! I tried removing and re-installing our store to no avail. Support tickets and live chats with Shopify were not helpful. I wish there was an easier fix available but unfortunately if you are having this particular issue, you must contact Facebook Instagram Shopping Partner Support through the Commerce Manager to request to have your URL unlinked so you can set up your IG store again with the correct URL of your custom domain. By the way, this whole thing happened because I applied for the shop BEFORE I changed to a custom domain. So if you’re setting up your shop, get the custom domain first before requesting a Facebook store.