be honest & truthful on wife\'s N-400
IF the N-400 is filed at this time, she should be open and honest with the information. NOT wise to get caught in false statements to immigration officer at natz interview...
However, efforts to find/obtain lawful status for spouse should be worked on simultaneously and might take priority! depends on how long out of status, are deportation procedings in place, how long employed without authorization, previous lawful status (or lack thereof), previous criminal convictions...etc. If serious problems exist, see competent immigration attorney.