Yes, it is illegal. They are committing tax fraud by filing false returns. If she knows they have been doing this but has allowed them to do so, it is possible she could face liability as a conspirator or accomplice, depending on the exact facts--and if she has received any benefit at all (like getting credits for social security) while knowing she was not entitled to them, she may have committed a  form of theft. Your friend is advised to speak to an attorney who handles tax cases or litigation immediately.