If a lost item is returned and you have it set to refund the patron the lost fee but also have it set to erase reading history the refund is not processed.
Sorry, I don't understand what you mean. Could you provide a step-by-step plan to reproduce the issue?
I assume Nicole means this: 1. Patron loses and pays for an item. Item is marked lost and fee is charged. 2. Circulation history anonymizes the data about who had the item previously. 3. The patron finds and returns the item. Koha no longer knows who had the item previously, so it can't refund them. If I'm correct in interpreting this report, I don't think there is a solution which both maintains patron privacy and allows them their refund. You have to pick one or the other. If so, the question for us is how to make that clear to the user.
Hm, maybe for a workaround bug 14945 could be useful.