GPS data isn't sent to the carrier as far as I know, they have no reason for needing that information.
Without GPS activated (it uses power to run it, so I leave mine turned off for that reason - smartphones are power hogs) your position is determined by triangulation off the towers that can communicate with your phone. If you are in range of many towers your position could be fairly accurate, but probably not. The individual tower information provides general direction and signal strength, from which an approximate position can be calculated with enough information. The more towers providing information the more accurate it will be. If you are out in the sticks and can only reach one tower it will not be accurate at all. The tower information is stored by the provider for a period of time, and that is what LE uses to calculate where, or approximately where, you were at a given time. They don't need the phone for that as long as the carrier hasn't overwritten the data by the time they do the analysis.
My phone (I have an Android, not an iPhone) will show the position accuracy when I have google maps open. With only the towers for reference it claims it is accurate to within 1100m (in practice it appears accurate to within 200-300m where I am). However, I have seen it say I was 10 blocks from where I actually was on occassion. WiFi could improve that, but you have to be in range of a network you can access for that to be of use. With GPS activate the accuracy is reduced to 20m and it usually gets it right (or at worst slightly outside the circle).
Since the phone is reporting the information it has, I would say that GPS really is off when it says that it is off. I don't know if that is not the case with an iPhone, but I would have thought that if it didnt really turn off someone would have done something about it because of the power consumption.
Btw, my phone does have the capability to report where it is if it has gone missing (there is a service for doing this), so I assume that GPS can be activated remotely if necessary as long as the phone still has power and is in range of a tower. You can do other things remotely as well, such as a data wipe.