We have been audited by the IRS recently with no issues.

of course the sale of hurricane damaged houses also confuses the issue (my house had no such damage but is only about 4 blocks from houses that did). 

But I knew and had worked with a couple of hard money lenders often enough as well to know that they’d fund any purchase in the range I was looking to buy in without issue if my private lenders didn’t have the capital or weren’t interested.So to answer your question I already had several lenders in place that I had worked with previously. 

We agreed to address the issues left by the previous tenant and you did not want us to handle it.

Can anyone recommend good companies to root cause  and implement solution to fix this issue?

I have done it in the past and never had an issue until recently.

WIth that said "passive" is relative lol. 

Are you aware of some actual legal authority that validates the IRS opinion on this issue?

I am still a relatively new investor and wish somebody told me this when I first started. 

Things can and will go bad, but once there is enough monthly cash flow generated it will be extremely difficult for that one big issue to put us away or even 2-3 big issues all at once.