Howdy,

I would not drill those holes larger; there just isn't enough "meat" to go larger and leave any sort of a safety margin. You could drill and tap between the existing holes on the same circle.

I didn't understand the bit thrown in about the muffler. Do you think the damage to the muffler is somehow related to the driveshaft flange? I don't see that at all.

The rub marks in the wheel well are common when oversized wheels of the wrong offset are installed. For someone to leave the wheels mounted long enough to rub holes requires nerves of steel. ;-)

I wouldn't worry too much about it. Patch the holes by whatever means suits you. Do treat the repair to prevent rust from forming.
--
Mr. Shannon DeWolfe -- (I've taken to using Mr. because my name tends to mislead folks on the WWW. I am a 51 year old fat man ;-) -- KD5QBL