It was implied that we would likely get audited and they would not be able to defend that claim. 

The IRS will appreciate it when they audit you.

Sure, life happens and I don't suspect that the authorities will be auditing you if you leave in six months...  

I'd go with a quality PM too that has no problem being audited.

You need to file suit in circuit court, pay filing fees, post bond, file notices and affidavits with the court, obtain an order ratifying the sale, every sale is audited, issues concerning surplus are dealt with by the court, etc.

Deals are audited from time to time, which can include a review of transactions.

Failure to report can result in extra interest and penalties...In my experience, the majority of folks who qualify for a preforeclosure short sale AND report and treat the income resulting from forgiven debt find the 'income' is fully or substantially exempt from tax.But, if an audit later reveals failure to report... the issue becomes more complicated than if it were addressed early on.

To clarify my OP, any lender can randomly select a property and do an audit.

I'm also told mixing professional and personal funds can be very painful for you to wade through if you ever get audited.4) The cash tracking and tax purposes of the LLC need to be handled by a professional, but an LLC has pass-through taxation which means you will absorb the tax burden of the LLC. 

Check with your cpa and tax accountant for the details and if they would support and defend such a position upon audit.