Initially the bullet has a kinetic energy K = (1/2)M v_cm². Where is this energy after the completely inelastic collision? Answer: it's all still there but it's been internalized... it is shared by many more atoms and molecules than before, and their center of mass is at rest. KE is not a vector! Also, it took work to deform the bullet and punch a hole in the wall, and this is accounted for by the increased potential energy of the atoms with respect to one another... they are now further apart. Or consider the disk brakes on a car. Intially the wheels have some rotational kinetic energy. Finally, where did it go?

In all processes in nature involving complex systems, there is irreversibility. Things only go one way. We never see the reverse process. Thus, a piece of paper set on fire burns to ash and smoke. We never see the smoke and ash recombine to form paper! However, almost all processes involving fundamental pointlike particles (electrons, quarks, various bosons) are exactly reversible. The process has the same probability of happening "backward" as it does of happening "forward." The reason is obvious... pointlike particles have no insides, there is no way available energy can be randomly distributed to the internal pieces of a particle because there are no internal pieces!