If it's real wood, paint it, and if it's that fake panel board, drywall.

Thank you. The tile is 12x12 Creme & tan with tan grout. Her couch is a very dark charcoal gray. She has a beautiful dark red rug. What color do you think she should paint the paneling?

It depends on her style, her accessories and artwork, and the part of the country in which she lives. I'm partial to a creamy white for painted paneling. I don't think grey would work with the floor. Can you post pictures, you'll get more responses and more solid ideas.

If it is in the budget, I would go ahead and remove the paneling and have drywall installed. The color scheme sounds a bit more contemporary to me and the paneling will fight with that, IMO.

You didn't say if the rug is solid or patterned, and if the floor has a more yellow tone, or taupe tone, which all make a difference. Here's an example of one room with painted paneling. I suggest she searches Houzz for ideas and gets samples from the paint store.