Question:
What size spacers should I purchase for the front and rear so they will be flush with the fender?
Answer:
They currently sit inside the fender by about an inch or so (just guessing based on what i see?)
Measure the distance. Spacers usually come in 5mm increments so buy the closest ones that are less than the distance. Overshooting will make you poke.
Are there any known issues when doing this?
Yes there are issues. Generally speaking, it is arguable that any spacer at all is a safety risk because now you have an interface between your wheel and hub that isn't permanently fixed to the hub. However, there are a lot of people who run quality spacers day in and day out with absolutely no issue so you will need to decide that for yourself. The more specific risk is dependent on the spacer size. If you need a thick spacer (generally 10mm or more) then you are reducing the amount of thread length for the lug nut which could mean it won't torque down or seat all the way. In this case, you need to get a spacer that relocates the studs.