Symptoms
The error we are receiving is:
Service: [URL]
Service Guid: [GUID]
Severity: Error
Error Message: The specified user [ID] could not be found.
InnerException Message:
or
Service: [URL]
Service Guid: [GUID]
Severity: Error
Error Message: The specified user [FQN] could not be found.
InnerException Message:
When using the Group's ID (top error) or Group (Name) item reference (bottom error).
Diagnoses
Group (Name) was returning the FQN of the group. SharePoint isn't able to understand the FQN as it is a K2 creation. SharePoint needed just the group name for it to be able to target it with the new permissions.
Resolution
Used the Group's 'Title' item reference to reference the name of the group. Using this reference as the target, all functionality worked as expected.