For anyone else who may be interested, here is my answer to @Ricardo.AlvesdosSantos's question that I provided on the GitHub Discussion he opened:

The extension intentionally doesn't support what you want to do. You have to pick a side. Since you're using Git and are happy to edit the files on your local file system, I suggest you turn off source control on the server and fully embrace the client-side editing workflow. Your local file system will be the "source of truth" and the extension will sync files with the server on save and compile them. The only change is that instead of using IRIS to run the source control actions, you can use any number of industry-standard Git-compatible tools. VS Code works well with Git out of the box, and there are additional extensions you can install to make that experience even better. You can also use a different GUI application like GitHub Desktop or Sourcetree, or the git CLI directly.