It isn't all that uncommon for real estate professionals to arrive at a property and find that tax records don't reflect reality. This can happen for many reasons, but sometimes it is because the owner did not acquire a permit for repairs or updating (i.e. finishing a basement; adding a bath; rewiring; reroofing etc).
Not all construction activity requires permits. This varies by county or municipality based on building codes. If you have a project and don't know whether you need a permit, pick up the phone and call the local building department and ask. In this case, asking up front is usually cheaper than 'asking for forgiveness' later. Each building department can also explain their processes.
The most common reason people seem to skirt the permitting process is that they think it will save them money. Most owners know that the more finished square feet reported, the higher your taxes. They may also not want to drop the relatively few dollars to even acquire permits in the first place. Many times the 'handyman' or the 'contractor' involved will imply you don't need a permit when you really do; and suggests it will be more expensive if you require permits. When this happens, I suggest you move on.
One of the most common questions I am asked by homeowners when doing an appraisal is "are you going to report the gross living area (GLA) to the tax assessor?" The answer is NO. We aren't the property tax police. We deliver our reports directly to our client and no one else (usually your lender). However, we will report your answer as to whether something was permitted in the appraisal report. It's best to answer honestly, even if the answer is "I don't know". The appraiser will also usually report if the repairs or improvements appear to be in a 'workman-like' manner or not. Ultimately, the lender decides whether they need proof of permitting to meet their underwriting criteria.
Generally speaking, I believe properly permitting protects you and your interests much more than the little bit extra you may have to pay in property tax and on the permit costs.
For starters, I wouldn't trust or hire a contractor who tried to talk me out of getting proper permits. Permits mean the contractor is held responsible by a third governmental party for doing your job 'to code'. Be especially wary if someone tells you it will COST MORE with a permit. Permits PROTECT you from potential shortcuts, shoddy work, and sometimes hazardous conditions.
One personal example: my whole house filter burst in my garage a few years ago. I had the repair work permitted as required in my county. The fellow who repaired some of the walls was required to put new insulation in those exposed to the exterior. He prematurely closed up the new drywall before the inspector arrived. I didn't suspect a thing, but the inspector who came out had him reopen them and found no insulation. He made them do the work over again properly. By getting that required permit, I had protection of a 3rd party expert and someone else to fight that battle for me with the contractor. Let's just say I've never seen a contractor argue with a building inspector! Having no insulation not only would have left my house colder in the winter and hotter in the summer ($$$), but also insulation reportedly has some fire protection qualities that empty walls do not have.
One of the worst things that can happen is have unpermitted construction 'outed' in the middle of trying to sell a property. Sometimes unpermitted construction cannot be considered in value because appraisers are wary to put value on something that your county or municipality could require removed or torn down (i.e. a garage conversion or whatever) at any moment. I'll never forget that 'unpermitted' ranch house that had been converted to an illegal duplex, added a second kitchen and baths, and was on septic that could only handle half that. That was a deal that wasn't going to close unless with an investor buyer with more cash than sense who was willing to illegally rent out a property that was illegally zoned, was overbuilt for its septic system, and unpermitted. The only way permits were going to be acquired on this would be to convert everything back to the original single family residence. This example was extreme and I withdrew from the assignment. I also received pressure from the appraisal management company and the lender in this case to value this property (but appraisal independence can be another blog post on another day).
So when selling, you could be required to bring everything to code before the deal can close.
In summary, if you believe you have unpermitted construction, it is usually in your best interest to retroactively have it permitted rather than remain unpermitted if at all possible. In my neck of the woods, this usually involves some minor fines, and maybe some required updating to the work done to bring it to code.