Any car can be "reported" stolen, and that report attaches to the registration, not the title. Presenting a title document will not be enough to complete the police investigation, however - and they do have a right to impound the car. It sounds like you weren't arrested - which means they don't believe it was you., but rather whomever sold you the car. In any event, you should meet with attorney to discuss your options in (a) recovering the vehicle, (b) recovering your money and (c) your actions against the seller.
According to Chapter NRS 481, the Department of Motor Vehicles is delegated the authority to determine who possesses legal title to a vehicle, even if it has been impounded. The Department has established procedures to resolve matters like this. The first meeting is a very informal and is with staff and a supervisor. Do not be surprised that you will be sitting at one of the counters where vehicle registrations are renewed. At the meeting you will be allowed to present information and documents showing that you are the owner of the car and find out what the DMV knows about its title. If the meeting does not resolve the issue to your satisfaction, you can ask for a more formal hearing in the DMV. Depending upon your confidence level, you should not need an attorney at the first meeting. If you are still concerned, take an attorney along. After the first meeting you may have enough information to decide what to do. Good luck.