I am new here, but ... in my opinion for this idea you'd have to specify for which audience do you plan it. That's because imho FPS players like to have a strong control of things - it's up to them precisely where they would hit. This system seems to be more for strategically, possibly tactically, geared games (which RPGs can be too).
By the way what about jumping?
Battlefield: Bad Company 2 features bullet physics and hitboxes... actually while playing that I heard than the usual and simple hitboxing is done by making a line from the gun according to the angle and then checking for hits -> from this I guess the bullet physics are much more costly then the hitchecking - remember it was present (in the simple for) even in very old games.
Actually there were issues with the physics bullets took some time to travel and due to networking you could shoot the player in front of you, see blood but him running unharmed as seen here: [url="http://youtu.be/QmJHRsojelE"]http://youtu.be/QmJHRsojelE[/url] ... although in case of long-range sniping it was interesting, but generally imho it's not yet time for it now, issues exceeding fun
Tl;dr - if it's rather FPS, I would stick hit hitboxes, probably removed bullet physics. If it's rather RPG, then I think it could be possible to do it your way.
Provided I haven't misunderstood your idea...