They do, or at least they regularly suspend and remove tweets for that. I get a bunch of "the person you reported violated the Twitter rules" notifications for many of my reports. (Note that spam reports never generate report notifications; as far as I can tell they just go to the "quality tweets" algorithm or even shadowbanning in extreme cases)

I assumed OP meant that Twitter is "over-sensitive" and bans you for just misgendering nowadays. I clarified that it doesn't action your account for that specifically but the underlying context, if it's part of harassing someone.