Hello,
I am certificated .NET/c# programmer working with .NET since 2002. Main specialization is WCF and WEB services. There is no problem to fix your XmlReaderUnWrapper class: switching from XMLReader to SAX solves the problem but you would know - this not a solution, you will meet huge problems sending data over the wire later.
Consider switching to WCF streaming or MTOM atachments. These 2 different techniques are designed for sending large data over HTTP. Both methods are sending binary data over the wire and your class may be excluded from the project.