It was the passport office that discovered the falsification. They won't process a passport to someone who is not a citizen and her drivers license, social security card, military identification etc. was all done pre 911 so the requirements were not as strict. We are looking for the best way to resolve the situation and it sounds like a lawyer is the best route. Her parents were not citizens at the time but are now. It is not just a don't ask don't tell situation because the passport office wants to "get" the woman who falsified the documents at the time. Seems that she did it quite often and for persons with no legal ties to the US.
thanks for your input.