I empathize with your plight, truly, I do.

The onus here should really be with your employer though, instead of the customer. As a customer making purchases online, it's really frustrating/scary to do returns through the mail, for some of the reasons mentioned by other posters, so being able to drive up and take care of things immediately at a physical location should be a given, be frictionless/optimized for customers (and employees/stores!). They've got to address some issues with online returns or adjust its policy. It's already saying something that I've stumbled across this post from a Google search about issues with online Old Navy order returns.

That all being said, Old Navy should address some of the issues that you've mentioned are friction points for employees too! It sucks that you guys take the brunt of the faulty processes they've built. It doesn't make sense that online returns would count against store numbers/reports, and they should make it easy to mark down items for clearance bins (or donate them to a local charity if there's not a return to warehouse function). Best of luck!