Rule Change-

[Bonbori]

By having an optional profanity filter you're sending the message that the filter is only for your personal use.

It is for personal use. But the choice has nothing to do with the profanity rules. Rather, the option determines how the in-game chat is displayed on your end - modified or unmodified. The option to turn it off is there if you don't wish the chat to be altered by an algorithm that could potentially produce false positives and impact the clarity of communication. It occasionally happens and is annoying so having the ability to turn it off is simple QoL.

However, whether or not the game filters out profanity is irrelevant to the ToS which objectively and explicitly forbids it. The message that it's bad comes from reading the ToS, not exploring the options menu.

I can see your side to this, of course there is a limit when general banter becomes inappropriate.
But let's say you're in a duty roulette, you make a mistake and die to a mechanic. You say "oh s*** my bad lol"
Is that really something that should be reported? Especially when there are filters in place, and filters that are removable.

That is the only thing I just can't understand.

And according to their rules 3.3 states profanity or offensive language. Something that a reasonable person might find offensive. So you can be in your FC chat with friends, and someone you don't know well or for whatever reason doesn't like you, (maybe you had a falling out as friends) and they decide to report you and claim to be offended. Is that fair or justifiable?

I suspect the vague "reasonable person" clause is there to cover cases like this. In both of your examples, the tired, overworked GM who had the misfortune of receiving that report would be the final arbiter of whether it came from a reasonable person or not. Should they decide the report wasn't reasonable... well... abusing the report function is itself punishable for wasting the GMs' time.

It's important to keep the human factor in mind. The judgement will depend on the context, the GM's subjective policy... or even their mood that day. So that's why I advocate just... never putting oneself in a situation where they could be reported for profanity. It's a gamble one doesn't have to take - cursing in any given situation is a conscious choice - so if it comes back to bite them, ultimately it's their own fault.