Hi Mike,
You are absolutely right.
If you want to deploy the DirSync, please add a UPN suffix of domain.com on the local AD.
Please note, if you have already created the account in Office 365, you should use SMTP matching to match on-premises user accounts to Office 365 user accounts for directory synchronization.
Please refer to the following link for the detailed steps:
http://support.microsoft.com/kb/2641663
Thanks,
Jason Jiang