Sydney, how are you trying to return it? Here in the UK (it might be different in Iceland) you can simply go on the Apple support website and reqeust a repair, and basically you give them your credit card details, and they send you a new iPod along with a box to send it back in, and if you don't send the iPod back within 16 days or something, they charge you for it, but otherwise it's free.
I've done that with things that were clearly my own fault (broke the connector on my iPod shuffle dock, google for pics, it's kinda easy to do when you leave it on the floor ) and they didn't even ask any questions, just sent me a new one and took my old one back