I have seen all three episodes that Aunt Fran is in and I still can't figure out how she is related. At first I thought she was Bill's sister but now I think she is Bill's sister in-laws sister. Anyone know for sure?

Yes, she is the sister of the kids’ mother. Note how in one of the episodes, she talks to Bill about “my sister Helen” and describes how Helen lives “in the next block”. She wouldn’t be talking like that to Bill if she were his sister.