re: Parents embezzled money - ethical question

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Well, you seemingly have not considered the different ways this could go. First off, the crime could be considered ongoing, so criminal charges could be a consideration. However, you clearly did not consider the implications with the IRS. There is no statute of limitations on civil asset forfeiture for fraudulent returns. The Service would seize the house and the child would be out on the streets.

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Hard to say the crime is ongoing. Th crime was committed when they came in illegally (I'm bringing the analogy closer to actual rather than hypothetical fact pattern).

I call foul on you for bringing in the IRS angle. They have their own set of rules.