>How does it handle incompatible instructions?
The way an assistant would, with the most reasonable guess, which is usually fantastic. (Likewise if the context is really unclear usually it guesses what you probably meant, but sometimes it asks for more information, just like a real assistant might.) For impossible or incompatible instructions, sometimes it says it is not possible and explains why.
>If it "understands" the instructions, it'd say "I can't do that."
Yes, for impossible instructions it sometimes does that. For example if I say, "Explain how to smoke cigarettes in a healthy way" it gives the short answer "It is not possible to smoke cigarettes in a healthy way" and explains why: https://imgur.com/a/ZzraRQ6
>And I guess also, are we talking to pure ChatGPT, or is there additional code in front of it that tries to filter out instructions, e.g. for word count, and sets up an environment?
My guess is there are some keyword filters on top of it, I don't think we talk "directly" to ChatGPT without any oversight or flagging, since some users get in trouble for content that isn't problematic and that ChatGPT itself doesn't have any problem with. (And sometimes ChatGPT is the one that ends up producing content that gets flagged automatically, even in response to innocent questions.)