Well it seems that you are truely concerned and even a little pissed at his parents, and who could blame you. Let me start with this, how is it that you know all the details but live 80 miles away?, does he call you often, information from his parents, about his school work and grades? Or is he complaining about having to be in a "special class".
At this point, if he truely is not reading anything, then you can not handle this on your own, you're going to need a lot of help, and how much help are you talking here? Are you saying you want to take on guardianship of you nephew, can you do that to your sister, can you afford all the legal issues that come with making that happen?
If you feel this child is suffering from a terrible neglect, and feel like you have to do something then do it. BUT YOU HAVE TO HAVE FACTS to back it up, or you're going to be looked at very suspiciously.
What you are describing here is an IEP.. and individual educational program designed for his special needs, although he may look normal, and act normal there are certain parts of the brain that learn differently and are affected differently by their environment, if seizures were an issue when he was young they still may be an issue that you aren't aware of that is controlled either by a drug, or a controlled environment, too flashy of colors or patterns of colors can sometimes make this happen, (as it's been reported that seizure sufferes don't do well in Las Vegas, or on some video games.) Pressure can also set off a siezure. For these reasons he may NEED an IEP.
Now as far as not being able to read, the school systems are poor all across the USA, and they do receive special funding to their school for each person requiring special needs, I would look into the schools practices and begin finding where his share of funding is being spent, then begin going to all of the school board meetings and bring up this issue, and see what kind of reponse you get. BUT do not make a big scene, be discreet about your concerns for your nephews sake, he has enough problems, he needs your help, not to become the focus of everyones judgement.
If you can not find satisfaction there, take it to your State Department of Elementary and Secondary Education, or State Representative, or even your Governor. They will open an investigation into the school if they believe there is legitamate neglect / falsifications of his education.
Believing he can learn to read and his ability to do it is going to be a long battle for him and you, but it is worth it.
Meanwhile, start simple, with flashcards, or writing out all the simple words with the same beginnings and endings, such as can, man, tan, and stop, start, stairs, etc. And another good idea is to buy comic books with simple words, and sit with him and help him sound them out, "hooked of phonics" is still out there, and may be helpful as well since you said he learns a lot from listening, these are audio tape based learning along with visual support and you can probably get one off of e-bay pretty cheap, since it's not highly advertised nowadays. Good Luck on your mission.