is it possible for any agency to use Bitcoin wallet transaction and track a persons IP to know their location?
From the transaction stored on the blockchain, no, it's not possible.
Your IP is not stored on the transaction data, it's not needed.
As far as I know, the only entity that can link your IP to your wallet (addresses and transactions) is the server/node your wallet is connected to. The gov agency has to contact the node operator to get that information.
As CT suggested above, for better privacy you should run your own node over tor.