If you withdraw a large fund in USD from a BTC exchange like MtGox everyday, wouldnt that raise flag with the IRS? Can the Feds freeze your bank account due to unknown source of money?
So in a sense, the government can actually interfere the btc network since btc isnt ever a currency.
No. If you have fiat currency, you're already outside the Bitcoin network and into IRS' playground, where you need to follow their rules. If your bank account gets frozen, the rest of the Bitcoin network will not care.
As for the source of money, it's simple: you sold Bitcoins, which you either bought, or mined, or received in exchange of products or services. Why would you be afraid of IRS if you were doing legit trades? (You *are* doing legal trades, right?)