May I have some help with IRS Notice CP2000 and sale of primary residence?

Normally if you lived in the home for 2 of the 5 years prior to the sale, the Section 121 exclusion applies and you don't have to report the sale at all, unless there is a gain in excess of $250k or $500k if married filing jointly. However if the closing agent cut a Form 1099-S reporting the proceeds from the sale, you must then report it on Form 8949 and Schedule D. If you don't, the IRS assumes that it's a taxable sale and uses a basis of $0 to assess any tax.

See Form 8949 http://www.irs.gov/pub/irs-pdf/f8949.pdf and its instructions http://www.irs.gov/pub/irs-pdf/i8949.pdf . The totals flow to Schedule D http://www.irs.gov/pub/irs-pdf/f1040sd.pdf . Simply report the sale and send the completed 8949 and Schedule D to the address on the CP-2000 letter. Attach a brief note explaining that the Section 121 exclusion applies but since it was sold at a loss it's a non-deductible loss. Don't attach proof of basis unless the IRS asks for it.

you can certainly prepare a Sch D reporting the loss but it will not affect your tax return, you cannot claim losses on your personal residence

this would have avoided the CP2000 but you can also merely return the form with the explanation that you had a loss and not reportable, this form does allow you to agree or disagree with their findings