1) Accounts are automatically removed/deleted after 18 months (1 year and 6 months) of complete account inactivity.
2) The account is completely removed. Once it is, someone else is able to create that account, only it will be addressed to their IP. Mods/Staff will know the difference between two different people.
3) Already said this, but accounts are are automatically removed/deleted after 18 months (1 year and 6 months) of complete account inactivity. I believe this goes for both ingame and forum, as you're using the account one way or another. Though, users can now delete their accounts automatically through the User Panel, and don't have to wait around a 2 week period for their account to be deleted after making the request. That was how things were done in the past, however.
4) This really isn't an issue, as long as you make it clear that you're two different people if you don't want to be mistaken for the same person. I've had this issue before. I used to be BigBangTheory, and there was another username quite similar. BigBangTheoryBBT I belive. We got asked if we were the same person a lot, both of us made sure we gave the accurate answers of course. Though, users are always more than welcome to ask a member of staff to confirm that two users are actually two different people if username alikeness ever does occur. Especially if fights kick off. Honestly, people can be very touchy when it comes to similar usernames. That's why people are expected to create unique usernames.
5) That is correct. If I were to login to the User Panel on my Bawfle account, I can make any changes to it. Say, I change my username from Bawfle to Waffle, someone else would be able to use Bawfle after the change. Of course, I previously was a Moderator here, so I could even probably request Raz for my username to not be taken by anyone as there is a high probability that someone could impersonate me. This has happened before. Since KovuLKD (the game creator) is inactive, their account got deleted, and another user decided to register or change their username to KovuLKD and started roaming around in FH. That was dealt with nevertheless.
If you want to find out more about accounts, you're welcome to take a look at the !! Information regarding registration !! (https://feral-heart.com/smf/index.php?topic=50461.msg685616#msg685616) thread, or my Understanding the User Panel (https://feral-heart.com/smf/index.php?topic=60793.msg838781#msg838781) thread.