One can speculate on all sorts of worst cases involving undeclared income, but if we restrict the downside to your deductions: worst case is they are all disallowed. You can always take the standard deduction, so if the $29K was the total of your itemized (no state income tax? no property tax? etc.) deductions you would be back to $6200 for single or $12400 for MFJ (or whatever the rate for the year in question).
Assuming you filed single and the standard deduction was $6000, you would recalculate your return with $23K less in deductions. How much that changes your tax due depends on the bracket you were in.
Don't know for sure on the penalty. A little searching finds
http://www.irs.gov/pub/irs-pdf/p556.pdf (which you may already have as you mention 20%):
Penalty for erroneous claim for refund. If you claim
an excessive amount of tax refund or credit relating to income
tax (other than a claim relating to the earned income
credit), you may be liable for a penalty of 20% of the
amount that is determined to be excessive. An excessive
amount is the amount of the claim for refund or credit that
is more than the amount of claim allowable for the tax
year. The penalty may be waived if you can show that you
had a reasonable basis for making the claim.
No idea if the various "tax audit defense" companies are worthwhile or not. It might also be worth checking with a local CPA or tax attorney. Good luck.