I've fallen in love with Ubuntu Feisty and haven't looked back into my Windows partition for a couple of weeks now.
So, I can't give you step by step instructions on how to do things in IE, and it also depends on the version. In general, I don't think there should be more of a problem with XOOPS based sites than with other sites that require a login. If you have your IE security levels scaled to be able tp log on to all the other sites you log on to, the XOOPS site should normally also be operable. But then, they've taken so much blame for lax security that now, IE displays more security warnings than actual content it seems. Particularly entertaining I found the ones that come up when you go for the first time to the Windows update site and get asked whether you find Microsoft trustworthy.
I think you can always add your XOOPS site to the list of "trusted sites" in IE. That should do away with all the cookie and referer in http-header related problems. Search for "IE trusted sites" or something like that on the web if you need instructions on how to do that.
Clearing cookies: Normally, and if everything's configured correctly, that shouldn't be an issue. XOOPS session cookies expire (are automatically deleted) if you close your browser. But there might be a problem if, for some reason, there's some residual cookie left that doesn't belong. How to delete them? I think it's on page 1 of the IE settings, possibly depending on the version you're using. Next to "offline files" and what know I. You should be able to find instructions on the web.
How to tell users they're caught in a problem because of restrictive privacy settings? That might be tricky because, of course, the XOOPS security traps snap for a reason and to prevent potential abuse. So if it doesn't keep you logged on, that's actually on purpose, if sometimes not particularly helpful. Also, there can be a lot of different layers causing the issue. Firewall, browser,...
I think there's an error message that comes with those situations, something like "No valid session," or perhaps even "You don't have permission to blahblah." You might write it down (the error message you're getting, I mean), then search for the phrase in your XOOPS language files. You can use tools such as PSPad to search for a phrase in the files within an entire folder structure. Once you have found the place where the phrase is defined, you might want to amend it with something like "If you have looged in and see this message, please try relaxing your privacy settings or contact the administrator." Something like that.
If you tamper with language files, make sure you don't insert quotes anywhere, and no apostrophes if you don't know how (most of the time, html entities work). They are likely to break the language file. Also, be careful with diacritics, they might also throw errors or generate weird signs. Make a backup of the language file first, change the phrase you want to have changed, then try it out. In Xoops, you don't normally have to update any modules or anything for your changes in the language files (typically admin.php, main.php, modinfo.php, etc. in /language/yourlanguage in the xoops-root and each individual module's directory) to reflect. If you screw it up, you can use your back up copy to quickly get back to normal operations.
Phew, that's long. I hope it's not more confusing than helpful. This problem is also discussed a couple of times on the forums.