Bitcoin is supposed to be completely anonymous and "untraceable" through it's encrypted network. But it was just discovered that the IRS has spent well over $100K on a proprietary software that tracks Bitcoin transactions and attempts to identify the individuals on both the buyer and seller side of the transaction. The vendor is named Chainalysis and their tracking tool is called "Reactor".
The Daily Beast discovered the contract between the IRS and Chainalysis where they expanded their order for additional licenses and services...sounds like they were happy with the product. You can view the contract and read more about it here.