Hi Jacob,
The best way around this problem would be to use the smtp feature. Unfortunately, using the PHP method will almost always mark them as spam (due to how phpmail and sendmail works). Unless, of course, it comes from a trusted domain.
Are you accessing this from the domain specified in your config file?
eg, if you have entered www.domain.com as your domain for access, you will likely get this error if you are trying to upload files via domain.com.