The fallacy is that the smell of dirty diapers will overwhelm and disguise the scent of the target. The truth is that dogs with good noses (which not all have) are quite capable of sorting out different scents from a multitude (in fact they do this every time they follow ANY scent, since almost everything in the world HAS a scent), and merely covering up the target scent is usually insufficient. Also, they can detect a mere handful of molecules, what any object might naturally ablate. Furthermore, experienced dogs learn that if you lose one scent, you follow an associated scent, in this case the foot track or bodyscent track of the person who hid the bagged target.
I used to live where some prior resident had thrown beer cans around the front yard, but across the years two feet of dirt had blown in over 'em (very fine dirt, very densely packed). I was mystified by the deep narrow holes my dogs were digging, til I realised the goal was an aluminum can, two feet down, which the dogs evidently scented and targeted. (Dogs tend to home in on galvanic reactions and electronics in general, even without training. This is why keyfobs are a fave chewtarget.)
[Pro dog trainer here]