If a new home owner bought a two family house and tried to rent one of the units and live in the other unit but was unable to, They’re father live in the rental unit but were receiving unemployment and couldn’t pay the rent. Can they apply for rental loss using schedule E? If so, What would they put on Rents received, repairs, supplies, utilities and depreciation expenses sections if they never rented one of the units before as first time home owner.
No. You haven't lost anything. You simply have no rental income to report. You have a primary home. You can't deduct expenses with the exception of mortgage interest and property taxes on Schedule A.
They bought the two family home with the intention of living in one unit and renting the other unit but were unsuccessful in renting. if they used schedule E form would they get penalized or audited?
You mentioned in this post that your father lived in the other unit rent free. You omitted that information from subsequent posts. "They’re father live in the rental unit but were receiving unemployment and couldn’t pay the rent". As soon as your father moved in, it was no longer available as a rental property.
My father only stayed there for a short time (2 month) can I use the rest of the year (10 month) as rental loss using schedule E? Would I get audited or penalized for using schedule E?
It's a decision you must make based on all the information you receive. It seems like you should have been able to obtain a tenant within 10 months. You have to be prepared for documentation about the steps you have taken to try to rent the property and whether the amount of rent you wanted to charge was reasonable and with the fair rental value of that specific geographical area.
The following publication will be helpful and informational about rental property.