As far as issues to watch out for, everybody else has pretty much pointed out the important stuff with the mkV's. For the mkIV's (fourth generation), the only major issue that comes to mind is the automatic transmissions. Basically, automatic mkIV's made from 2000 to 2003 (please somebody verify those years for me) used the 01M automatic transmission which is known for failure between 80,000 and 120,000 miles. So, if at all possible, stay away from automatic VW's made in those years.
Here are some mkIV interior/exterior pics to help you out...
^^^This seems to be a slightly modded interior with the tan plaid wrapping around the steering console, armrest, and A pillars, and the touch screen headunit, but you get the idea...
And here are some more pics of a mkV (current generation)
Notice that with each generation, the first interior pic is of a relatively decontented, basic model, and the second interior pic is of one with more options.
Overall, the interior differences are slight, assuming that you compare cars with compatible or similar trim packages. If you aren't really into cars that much, probably the most obvious difference will be the fact that there is less room in the earlier generation. And, since the mkIV's are older cars, there are more of them with more miles on them, so they tend to be more "used" and often abused both inside and out when compared to newer mkV's with less miles on them.
Like everybody else said, the mkV is a good bit larger than the mkIV, and of course, the engineering has been upgraded to a certain level, and the engines offered (both gas and diesel) are all more powerful than the ones in the mkIV. Hope that helps with your search!