In newspaper interviews Mr Gauke said the practice came at “a big cost” to the Treasury and meant other people had to pay more in tax reports The BBC.
The government has highlighted its desire to clamp down on tax avoidance.
But Treasury sources stressed Mr Gauke was answering a specific question rather than proposing a policy change.
Mr Gauke was asked specifically about the practice of offering to pay tradesmen cash in hand in the hope of avoiding paying VAT on a bill in interviews with journalists for the Daily Telegraph, Guardian and Daily Mail.
The Daily Telegraph quotes Mr Gauke as saying: “Getting a discount with your plumber by paying cash in hand is something that is a big cost to the Revenue and means others have to pay more in tax.
“I think it is morally wrong. It is illegal for the plumber but it is pretty implicit in those circumstances that there is a reason why there is a discount for cash. That is a large part of the hidden economy.”
Speaking the the BBC’s Newsnight, Mr Gauke said there was nothing wrong with paying in cash, but doing so to actively avoid tax was wrong.
Mr Gauke told the programme: “When a tradesman says ‘here’s a 10%, a 20% discount on your bill if you pay me cash in hand’ that is facilitating the hidden economy, that’s as a big a problem in terms of loss to the Exchequer as tax avoidance.
“Revenue is not being paid as it should be paid…”
He added that he had “never said to a tradesman, ‘If I pay you cash, can I get a discount?'”
But asked if he thought any colleagues had, he replied: “I don’t know, but if people do do that they have to do so with the recognition that means taxes will be higher for the rest.”
The Labour MP Austin Mitchell, who sits on the Public Accounts Select Committee, described Mr Gauke’s remarks as “petty” and said it would be “impossible to police” any efforts to cut down on the practice.
Last month Prime Minister David Cameron condemned the use in the past by comedian Jimmy Carr of a Jersey-based scheme as “morally wrong” and in his Budget speech Chancellor George Osborne described tax avoidance as “morally repugnant”.
Mr Gauke was interviewed after he outlined proposals to tackle tax avoidance in a speech to the Policy Exchange think tank.
He said the government would force “cowboy” financial firms to disclose the names of people using “aggressive” schemes.
The plans comes alongside plans to legislate to curb tax avoidance through a general anti-avoidance rule.
