Took IRA distribution for 1st time home, but closing fell through. I returned the funds after the 60 days. Will I be hit with the 10% penalty for going over 7 days?

Because the purchase was cancelled, the 60-day rollover deadline becomes extended to 120 days.  Completing the rollover on the 67th day following the distribution is within the deadline.  (This assumes that you indeed met the qualifications to be a first-time homebuyer were it not for the fact that the purchase fell through.)

Provided you did not roll over any other IRA distributions in the 12 months proceeding this distribution, this distribution was properly rolled over.   Simply report the rollover as you would any other by entering the Form 1099-R and indicating in the follow-up that you rolled the distribution over.

Thank you for your comment dmertz. After inputting the 1099-R provided by the custodian, we are still being penalized 10%. What type of supporting documents can I provide the IRA to provide the sale was not finalized and we are indeed first time home buys? Additionally, do I pay the 10% now and when the 5498 is sent to the IRS by the custodian will I be reimbursed for that dollar value?

Thank you again for your input.

No supporting documentation is needed unless the IRS specifically requests it to substantiate the reporting of the rollover shown on your tax return.

If you are seeing a 10% penalty on line 59 of Form 1040, you have not properly reported the rollover, you did not roll over the entire gross distribution, or you have a a penalty calculated on Form 5329 for some other, unrelated reason.  Was any amount of the distribution withheld for taxes (Form 1099-R box 4)?  If so, did you complete the rollover of the full gross distribution by substituting other funds?

If incorrectly reporting the rollover results in you inappropriately paying a 10% penalty, do not expect the IRS to correct your reporting.  They'll just keep the money.

Edit the Form 1099-R and re-answer all of the follow-up questions.