I have made this a bunch of times and never got any balls... you said you sifted so I am not sure...
Are you using a stand mixer with the paddle attachment? I have done both the paddle and the dough hook with no problems. Maybe mixing it longer would help or when it's done mixing do you flip the bowl out on the kneading board? I take the MMF out and leave the bits in the bottom so that when I start to knead I only have the mixed part. (You know sometimes there are residual things in the bottom of the bowl, extra sugar and stuff)...
I am not sure, sorry - but here's a bump for you.
I hope all works out well. 
I have to ask the same question about turning the MMF out on the counter or lifting the MMF out leaving the crumbs and balls in the mixing bowl. There is ALWAYS pieces left int the bowl that doesn't get worked in and I sure wouldn't want those to be included. Don't worry about getting it all mixed in. Mine never uses all of the sugar. Also, I found the dough hook to work the best.
I have made a lot of MMF. Sometimes it gets the little hard lumps in it, and sometimes it doesn't. Sifting doesn't seem to make any difference. The only thing I've found that helps is to add the powdered sugar gradually. If I still have lumps, I knead and knead (with my hands) and just let the lumps fall out as they come to the surface.
Why they form is a mystery to me.
I just made my first batch kast night and I used 6.5 cups of sugar and NEVER sifted. I did have the stuff on the bottom of my bowl but I kept rolling it in the bowl until it was in the MMF. ANd once it was in the MMF I kept kneeding it until it was smooth. It might be a different story for me in a few hours when I go to cover the cake with it. But did you cover your work space with crisco? A good coat of it! As I was kneeding the MMF I would here and there keep covering my hands with crisco. Good Luck.
you guys are amazing! thanks for all of the help, i feel like an idiot lol! i have been doing it completely by hand 
i'm sure i read somewhere that it would tear your KA up if you used it... guess i must be mistaken since you guys have had so much success. sooooo good to know hehe 
i couldn't figure it out for the life of me b/c i do sift and i do coat everything in crisco. i just knew yall would have the answers, thanks again!
I don't have a KA so I have always made MMF by hand. The only thing I can say is knead until its all incorporated. I have noticed little specs of sugar in the ball but it happens before the MMF is done. I knead for 8 minutes after the sugar has been pretty much in the ball. After the 8 minutes the little sugar balls are gone.
What has worked for me is after microwaving the marsmallows and water I add a little sifted P. sugar and mix well, then a little more until it has cooled down. I then dump it on a marble tile coated with Crisco and kneed in the rest of the sugar, no lumps and nothing left on the bottom of the bowl, ect. I alsp coat my microwave bowl with Pam first as well as my spatula to mix.
Good luck!
Tracy
Let me correct myself. I knead from the start to finish but I don't start the 8 minute timer until I feel like all the sugar is incorporated. Then at the end of 8 minutes your mmf will be elastic and shiny (well, I rub mine with crisco) and smooth. Yes, you can also microwave the fondant (you will when it gets hard anyways) and that will melt the sugars. But only a few seconds at a time.
Exactly what I was going to say lsawyer. Your grade of powdered sugar is very important. I have found that if you do get little lumps grease and wrap tight place in fridge overnight and they dissappear. Fondant is best if left to rest overnight I find much more pliable.
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