"It is a dog."
The placement is inherent to the words used to refer to things. If you had used そこyou would have used に (or maybe には), but you should probably use います, not です. それ refers to the thing, not the placement, even though you say it's close to the listener, thus に would not be the right particle.
Just to clarify: それは犬です would mean something like: "Speaking of that, it is a dog". それ becomes the topic in this sentence.
犬です on its own could mean different things depending on context. Often we would assume that it meant "It is a dog", and thus it works as a translation for this exercise. However, since the topic is not stated, it literally just say "Dog is" or better "Is dog". This means that 犬です could mean "That is a dog" as well. This is the thing with Japanese. Everything is decided by context. 犬です could mean "This is a dog", "It is a dog", "I am a dog", "You are a dog" and even "The cat is a dog" although I have no idea in what scenario it would be like this.
This makes it hard to translate single sentences on DL to sentences used in real life. There is no context here. I am not saying that DL is bad, in fact I think the opposite. DL is an amazing language learning program that can be used for free. You can't use DL alone though.
I think this should be translated as "that is a dog". Also noticed that people may make a mistake with kore, sore and are often as it is not explained by pictures. It is related to the position of the object relative to the speaker and person spoken to. Novice language learnerns wont get this if its not explained in pictures.