A few things to consider...
Comparing the smoke flavor you achieved on a gas grill as your "standard" (even with a foil packet of chips) will be much different than on a dedicated smoking device. It might just be your personal taste that dislikes the more pronounced smoked flavor you achieve with a long, low smoke.
Chips are more likely to combust over chunks, even if you soak or foil boat. For low and slow ribs, etc, if chips combust, the flavor is different than chunks that don't combust (turn into black pieces that look like charcoal).
When you are done with a smoking session, are your chips white ash? Or do they look like black charcoal?
Maybe the fact that your chips burn out so quickly on your gas grill gives less smoke flavor, and is preferable to more smoke flavor from the SI. But you said you were using very small amounts of wood, so still confused.
I have used Weber, big box, dried out wood chunks on my SI, and have not experienced anything too disgusting to eat. Far from it. In my opinion, these SI's produce darn tasty food, without much fuss (and I am known to my friends as a serious foodie). SI's are actually very simple, wood, meat, time. I think people are stretching in this thread to come up with a solution, and over-complicating things, to what seems to me, might just be a personal preference to the taste of smoked food. I know my mom absolutely hates smoked food. She is okay with food on the grill, but beyond that, not her thing.
Besides you and your wife, have you gathered other opinions from friends, neighbors, on the taste of the food? Can you describe the bad flavor you are experiencing? Bitter? Clove? Burnt? Ashy? So far, you've just described as bad.