We have had a handful of clients audited and the self-management of the LLC has not been an issue.

We can also assume that under audit, these deductions will likely be challenged and it will be up to you to defend the deductions. 

That is why (as suggested above) I thought perhaps an Attorney can impartially explain and suggest what to do.Thanks a lot for suggestions

If audited you will have to pass the sniff test.

I know that when it comes to an audit, the IRS requires 85% of audited expenses to be accounted for as an example so you are still within that allowed 15% margin of error so to speak.

Sounds illegal, or at the very least a good way to get audited. 

If you try to claim this is not a flip and you flip another property in the future, you will subject this transaction to audit risk and potentially large penalties.The biggest variable here is whether or not you can prove the intent was something other than that of flipping.

In the event of an audit with a system like this would the IRS request physical receipts, or would the itemization the system generates satisfy them?  

The last audit I had was a while back and they came back and said I owed them under $200.

As for the deduction for paying people in cash, it depends on what your tax advisor is comfortable defending should you be audited.