Edited by jstpmm - 11/18/11 at 5:26pm
They don't have to know you reported it necessarily. I would report a perfect stranger for doing that. If you had to defend it, it's legitimate- your concerned for the safety of a child.
I would have called 911 at the time if I felt the baby was in immediate danger. Since it wasn't reported that moment, it is probably a child protective services issue more than a police issue now. I am a mandated reporter and so would be required to report it, regardless of what I thought it would make me look like.
In my state your privacy would be protected unless it went to court. If they were willing to do it in front of you guys, I would guess you are not the only ones who have seen it, so they may not immediately know who reported it. You can also report anonymously.
Alternately, if you have a good relationship with them (I would guess not really, or you would have already considered this approach) you or your husband could tell mom and/or step-dad directly that it really scared you and ask if there is anything you could do to help them -- if they need another car seat, if they need different carseats to fit three in the back, if it would help for you to drive the step-kids home until they figure out a safer option...
I'm a step-parent within a moderately high conflict co-parenting relationship, and I think I still would have brought it up as diplomatically as possible with my step-kids mom or step-dad. But I (a) can't imagine them doing that, especially not in front of me and my husband, and (b) know that I would not be putting my own safety at risk by bringing it up,,, at worst I'd be "yelled at" by email, possibly in person, or ignored. I know that's not the worst-case-scenario for everyone, so sometimes the direct approach isn't a safe one.