I'm wondering if the garage was drywalled at the time of construction or if it was done sometime after construction. If the drywall was done afterward, then the AHJ probably never saw this. I can think of at least one other scenario where the inspector may not have been aware that a surface cover would be used with a flush mounted box.
As for the 1/4" setback, this is allowed (312.3)
The only violation I can think of off the top of my head is not installing the equipment according to its listing (110.3(B)) and in this case I don't think this installation presents an imminent hazard.
Maybe a proposal for ugly work is warranted in the next code cycle
as I'm sure this panel is far from beautiful.