Problem is that soft deleted user in AD recycle bin is conflicting with newly created user.
- Download and install new 365 PoSH tools from http://onlinehelp.microsoft.com/Office365-enterprises/ff652560.aspx
- Connect to posh and log in.
> $Session = New-PSSession -ConfigurationName Microsoft.Exchange -ConnectionUri https://ps.outlook.com/powershell/ -Credential $Cred -Authentication
(prompt for admin credentials)
> Import-PSSession $Session
> Remove-MsolUser -RemoveFromRecycleBin -UserprincipalName email@example.com
- User will be deleted from recycled bin after about 30 seconds.
- Rename new user to old user in MS Online admin panel.
- User can now send and receive email in outlook as normal.