Right now this is just a rumor, so let's break it down.
Why this makes sense
Phillips and Gary Kubiak have a long history. The two worked together in Houston - Kubiak as head coach, Phillips as defensive coordinator - from 2011 to (most of) 2013. So this is a case where Kubiak would be falling back to an assistant coach he knows and most recently used. That's the biggest draw.
Phillips also has a history in Denver. He was Broncos defensive coordinator from 1989 to 1992 and head coach from 1993 to 1994.
Finally, Phillips is pretty good at coaching defenses. From 2011 to 2013, Houston defenses ranked in the Top 10 in yards allowed every year and Top 10 in points allowed twice. With the Broncos over 20 years ago as DC, Phillips had two very good years, 1989 and 1991, where the Broncos defense ranked in the Top 5 in both points and yards allowed.
Why this doesn't make sense
The Broncos are still interested in Vance Joseph, and may even be negotiating with the Cincinnati Bengals to let their man go.
RT @RSH089: Any word on defensive coordinator prospects? ——> I don’t think they’ve given up hope on Vance Joseph. Negotiable.— Vic Lombardi (@VicLombardi) January 22, 2015
Plus, remember - Phillips was head coach in Denver, and he ended up getting fired. Who knows what sour grapes might still be out there on either side.
Likelihood it happens
Right now, another candidate hasn't emerged, so it's either Joseph or Phillips. While I think Phillips' history in Denver might throw a wrench in the works, I also think enough time has passed where that should be a non-issue. I think Phillips coming back is more likely than the Broncos getting a deal done with the Bengals.
In my mind, Phillips is the slight favorite to be D.C. until another name emerges.