When I originally developed the plugin, either WordPress, or Hostmonster (my hosting provider), prevented me from sending email from addresses that were not set up and local. No matter what I tested, if the account was not setup locally I would always see emails, from the server, coming from an @host.hostmonster.com address. On a whim, on two separate servers (different hosting companies), I tested sending from various email addresses including ones locally setup, ones not setup but using the same domain, my personal gmail address, an address on a remote domain I don’t own and didn’t check to see if it exists, and finally a random string of text. Only on the last did I encounter any issues, and that was only to show the email coming form that Hostmonster account.
I guess that restriction no longer exists.
As to why you would no longer receive emails after having the account set up… I’m at a loss. There’s no reason I can think of why a local account would prevent emails being sent.