Fictionalizing Nonfiction

Several of us have been debating how much "fictionalizing" is acceptable in nonfiction. If the basic facts are true and correct, is it acceptable to enhance dialogue and setting? Or to change names and gender? Moreover, if that's allowed, at what stage in the process should the author inform the editor—in the query letter, the cover letter, or when working with the editor on revisions?

The only time it is acceptable to change the facts in nonfiction is when you're using case studies to illustrate a concept and you change the name of the person and their identifying details. This should be stated right up front in the book's introduction and as a footnote on the first case study.

If you enhance the dialogue and setting, change name, gender or any other fact, then it is no longer nonfiction—it is fiction, based on a true story and should be labeled as such in your initial query.

Update: You have a little more leeway with memoirs and autobiographies. As Annette commented, you can't go all hogwild with the facts, as did James Frey in his "memoir" but you can alter some details to protect the innocent (or guilty) and you can adjust conversations somewhat. Tell you editor exactly what was changed and they will help you stay within acceptable limits.