The Bitcoin ETF will work just like IOU because the institution and the government never like decentralization.
This is clearly the future the government want for bitcoin. The majority just buy ETF IOUs. Those who do actually buy bitcoin can only do through via KYCed exchanges, and their bitcoin can only move from there to other KYCed exchanges. Actually owning your own bitcoin won't be allowed - after all, what are you trying to hide? 
But can the IRS be trusted that it won't share sensitive information with its fellow government agencies?
They will, of course. All branches of the government freely share all the information they have on you with each other.are we then limited to the option of transacting face to face and on cold cash basis?
If you want no traces left in the fiat system, then cash in person is the best way to do it, yes. I've done this for years. It works well.