He knows he can't get rid of one problem without a whole host of other problems coming in its place. He saw this with the Tuco thing that got him in this mess to begin with.

I think it would be smart to let things be after copping to the gun because, for all Tio and the cartel know, he is just an innocent civilian. They don't know he was involved in a setup to get Tuco.

The odds of him and his family being safe seem a lot greater if he simply plays along