If a permanent resident know their spouse is committing fraud (ie welfare fraud). Can USCIS penalize the PR spouse?

No. However, if you care for your spouse, you must consider how or whether to discourage them. If you are uncomfortable with their actions, then you must decide whether this was the person you thought that you married. No attorney can predict the future. What follows is the law. Also, possible steps to protect your right to remain a lawful permanent resident.

There is no requirement that you must report them. You may, but you need not do it. If you find these action so offensive that you cannot live with the spouse, then you should contact an experienced immigration attorney. The attorney can discuss ways to protect yourself should you decide that you need to leave the spouse due to "irreconciliable differences." There are documents that you should secure should you decide to separate from your spouse. These are personal decisions.

If other crimes are eventually committed in the household, and law enforcement thinks that you committed a crime, you may be charged. This can cause serious trouble for you. Your spouse may be insensitive to your needs, so you need to be careful.

If you are ever charged with a crime, then you will also need a criminal attorney who understands deportation or can work with the immigration attorney. You may not be able to plead guilty. It may also be difficult to prove that you are not guilty to a judge or jury. Defending yourself in criminal court can prove even more costly.

The above is general information and is does not create an attorney-client relationshp.

It is never a good idea to snitch on your spouse to the authorities if you want to stay married. On the other hand, unless you are living separate your spouse's fraud could effect you. However, it is not clear what you mean by fraud and if it is even a probelm.