See http://www.irs.gov/pub/irs-pdf/p4535.pdf (in English and Spanish).
This is a crime. Report the incident to your local police. Also, report the crime to the Social Security administration and the IRS and anywhere else you know the identity was used.
Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.