I was told if I do this, then we will be reported for fraud even though I state that the other parent will be claiming my daughter
The box that say the other parent is claiming her is only applicable if you don't live together. So just omit her from your own return.
If you both live with the child, you can agree who claims the child and all the benefits. The child can only be on one return and not on the other at all. The benefits cannot be split.
The dependent interview is confusing since it asks about custody without really explaining what that means. That can lead you to answer the questions in a manner that gives credits to both parents when they both live with the child which is not allowed. The child can only be on one parents tax return and not on the other at all.
*Only* divorced or separated parents that have lived apart for the last 6 months of the year can have a *custody* agreement. The parent that physically lived with the child is the custodial parent and the parent that did not live with the child the non-custodial parent. Under those circumstances the custodial parent can release the child's exempt to the non-custodial parent who did not live with the child with a 8332 form (which is a custody agreement).
When *both* parents live with the child, no such custody agreement can exist since both parents have equal custody and there is no non-custodial parent. The dependent and all the benefits can only be claimed by one parent.