I found that PHPMailer does not support DSN, so I had to change the class.smtp.php class itself.
Original code:
fputs($this->smtp_conn,"RCPT TO:<" . $to . ">" . $this->CRLF);
Change to:
fputs($this->smtp_conn,"RCPT TO:<" . $to . "> NOTIFY=SUCCESS,FAILURE ORCPT=rfc822;" . $to ."" . $this->CRLF);
As for directing the DSN to a destination other than the sender address, this can be achieved by determining:
$mail->Sender = "bounced@email.com";
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