If memory serves me correctly, they have their own blockchain analyzer and tracer. However, something like Wasabi Wallet might make the IRS's job a bit harder and keep them a little more honest perhaps.
I've also been wondering, how do they look at these millionaires who cash out from before KYC was a thing?
These millionaires have lawyers and tax advisors on their payroll, who provide them with solutions to what you are talking about. Instead of asking in a forum, they ask their lawyers about the doubts you mention.
Besides, you are taking a lot of things for granted, which need not be the case:
The gov going to arrest them because they cant prove how they bought them?
Not in all cases are millionaires going to be unable to prove that. And in any case, most of them legalized their situation long ago, not now. Look at the Winklevoss twins for example.