I bet the amount of money off the books in the service industry is jaw-dropping. It makes perfect sense that this would be the case, and will continue to be. It's just too easy, and it's human nature. You have money in your pocket, and you have the choice to keep it, or simply "give some of it away." I know what I've done in the past. Combine the recession with the fact that the service sector is only growing larger in this country and the trend will be for more money to move underground.
If the government wants to capture some of this they need to design a tax system that works with human nature and the types of jobs that people engage in that generate this income, because right now setting cash aside to give away when it's physically in your fist feels almost physically wrong to people and so it's just not gonna happen. Humans aren't machines, and you have to respect the psychology of them in the aggregate, if not, you're the one being unreasonable, not them.