Gross income includes all income from whatever sources derived...this includes compensation for services and the value of services received. Paypal is just a conduit between a buyer and a seller. Just because the IRS can't "see" the money doesn't mean that it's not taxable. There are other ways the IRS can find out that you have been receiving income from other places. For example, if you were to be audited, they would look at your bank records from the past three years. Included in those bank records would be frequent deposits from paypal. These deposits would then raise a question as to where the money was coming from and whether you paid taxes on it. Long story short...if you're spending money the IRS could question where that money is coming from. IMO, it would be easier to pay taxes on what you get through paypal rather it would be to come up with the backpay should you be audited in the future.
If you want to avoid paying taxes, just hire a good accountant. Look at the Rolling Stones - the way they avoid paying taxes on their phenomenal earnings is astounding.
the problem comes if your customers report the fact they sent you income... if you're making large amounts of dough, you could get in trouble. I'd ask an accountant--or somewhere in an accounting forum such a hypothetical question ...as I am sure you're doing now
Federal Prision is the only reason I pay taxes. It is stupid to try to cheat the system. Going to jail isn't my idea of a good time to save $1,000