My dad got a form from IRS that they are auditing him for 2007 taxes on the house ... why would they do this?

You have not given enough facts to know what tax issues are being raised. It may be that he sold his home for a lot more than the $250,000 exemption. If he kept a record of the cost of his home and the capital improvements to it then he may show that his gain is within the exemption amount. If your Mom is still alive the exemption may be $500,000. Having said all this, I am just guessing here. You need to get more facts from your dad and see the audit letter.

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