SMTP Proxy is specifically designed to intercept all outbound traffic on port 25 from LAN clients in order to prevent infected (or unauthorized) LAN workstations from sending SPAM. It doesn't sound like this applies to you, so you can have it on or off.
I can think of a couple configuration settings that would result in disappearing local email:
1) Mis-configured external DNS settings
Any server outside your network will deliver email to your users to the server with the lowest numbered mx record in DNS. What is the lowest-numbered MX record returned when you lookup your mx info on the dns server at 4.2.2.1?
nslookup -type=mx <youremaildomain.com> 4.2.2.12) Mis-configured mail server
If any server that your email passes through thinks that it is *the* mail server for your domain, it will "deliver" the email to a local mailbox instead of passing it on to the correct MX record. So, if you're relaying through Comcast and Comcast thinks they host your email, their servers may be swallowing your email.
If you haven't customized your settings at GoDaddy, by default GoDaddy will have setup your MX record to deliver email to GoDaddy's servers, and they will have configured their servers to accept your email.
You might expect to get a bounce message if you haven't setup all of your users on the server that is getting your mail -- but the server might be trying to send the bounce message back to your local domain name, which means to itself -- it would detect the bounce loop and stop trying. Or the server may be configured with a multi-drop mailbox that is collecting all of the email for anyone at your domain.
You can either fix the configuration so that your email is delivered to your SME server, or you can find your email and configure
multidrop or
Fetchmail to download the email for your local users from whatever server is blocking it.
[edit]
fix multidrop url