For the last two years I have file a joint tax return with my non-resident spouse, without making a declaration have her treated as a resident for tax perposes.

Then today, I stumbled across the link:

http://www.irs.gov/businesses/small/international/article/0, id=96734,00.html

where I learned we should have made such a declaration.

Now here is the problem, in regards to any sublimentary tax forms, such as schedule B I have been treating her as a non-resident. I'm fairly certain there would have been no tax due had I done it the otherway, but they could be huge penalties for misreporting information should I try and amend the past returns.

I also learned that I could have been filing head of household instead, and also owing no taxes. Unfortunately, past April 15th, there is no procedure to change a joint return to a non-joint return.

Should I just hold my breath for 7 years and hope I do not get audited? Or is this really a non-issue, and there won't be any penality because we never declared her has a resident for tax purposes?

I don't think you were misreporting information, you simply failed to make the election you should have. I would file amended returns, including the required election.

But this passage from the Information to which you linked is interesting:

That's flat-out wrong: For the first 9 days of 2010, D1ck was a resident alien. So, I guess even IRS publications can be incorrect. Who would have known? :)

*Silly forum filter!* Won't let me type "D1ck" correctly. :)

Never mind. It turns out I did it the correctly as described in pub 519.

Publication 519 (2011), U.S. Tax Guide for Aliens

You mean I wasted 9 minutes d1cking around with the forum filter for nothing! Oh ****! :)