Asking again to get more opinions: Bad situation, what would you do with your kids?

Here is a little back ground first: I moved into a duplex 4 years ago next to a old lady. She seemed nice to begin with but the more we saw of her and the more my kids played outside the more we understood she wasn't nice at all. When I moved here I had a 1 1/2 year old and a six month old and I was pregnant with our third. We have put great effort into not letting our kids in her yard (even though there is no physical boundary set) and to keep them away from her things. But as everyone knows kids will be kids and the instant one of them would step onto the grass in her yard or reach their little hand out and touch her car (which is right next to ours) she would open the door and scream at them making them run and cry. I would like to mention that I have never let them touch her things and if they do I will tell them no, put them in time out or they get a swat on the behind. So I finally got sick of the way she was treating them and called the landlord and complained. They sent her a letter telling her to leave my kids alone or she would be evicted.

Well just 2 days ago she comes to us and says she has called the police to report a vandalism because our kids scratch her car. I went out and indeed her hood and one side of the car had been scratched pretty bad but my kids had been inside since Monday with the flu and had only been outside for about 10 min that day before I loaded them into our van and took them to the park. She said it had happened that day. Also no one around here including herself saw my kids touch her car and we have two neighbors next door. She is just assuming it was our kids because like i said they have touched her car before, even left little hand prints. So a police officer came over and asked my 4 year old (was six months when we moved here) if he had touched it and being a 4 years old and having no idea what he was talking about just kept telling him it was a blue car. But he insisted that he would come back during the day and ask him some more questions. Well the next day came and he never showed so i called the officer and asked him if he was coming, he told me he would be here tomorrow. So I have been thinking this whole time how inappropriate it is that he wants to question my 3,4,and 6 year old as they are too young to really understand what he is even talking about. Not to mention I had just spent the day taking each of my kids out there numerous times and asking them if they had touched it and all of them saying no. Even asked my 6 year old if the others had done it and he said no every time. (I know they never did but wanted to ask because the cop asked me to). I don't want them talking to the kids anymore, just doesn't seem right to me. All they would need is a yes from a kid who didn't understand and that would be enough, right? Would you let them come back and speak to your kids again even if your kids didn't understand what they were talking about? I realize that my 6 year old would understand but I also KNOW my kids didn't do it as i had my eye on them the whole 10 min they were outside that day.