Because ann am (and ann an) just means in, there is no definite article here. Originally the preposition in was just an or am (so in a town would be am baile), but since this looks exactly like the definite article and the 3rd person plural possessive pronoun their (am baile can also mean the town or their town), people started to say ann an and ann am, there in, in-it in to make in unambiguous, hence: ann am baile in a town.
in the town would be anns a’ bhaile where a’ truly is the definite article (which lenited the following noun in dative), but the preposition changes to anns before it. It could also be shortened to sa bhaile.
Good question, I think I’d expect there is… here too, but I’m not an English native. I guess it has something to do with in a town having indefinite a house (so it’s not a particular place, so maybe doesn’t sound that natural here, as it’s not really an existential sentence?). But if so, perhaps both should be accepted?
Might be worth reporting using the Report button under the exercise.