My car is impounded, where can I find it

If your car is not insured you can simply destroy it and you will be rid of it.

For insured cars it is a bit trickier:

• If your car is worth less than $50k you will be able to sell it to Los Santos Customs and get rid of it permanently that way.
  
• If the car exceeds that worth you can replace it with another car when your garage is filled completely. Just drive a car into your full garage and you will get the warning that the garage is full and if you wish to replace a car. After the loading screen you will be prompted to choose a car for replacement.
  Be careful with pressing the "OK"-button as to not accidentally lose the first car on the list, if it is not the one you want replaced.

The point is to locate a vehicle that won't give you wanted stars or give you a bounty for stealing it.

The feature definitely seems bugged, as that ATV is commonly what has been located for me, even if it is halfway across the map from my current location. You would expect the vehicle that is located would be in some close proximity to you