Rather than sticking a hand up the other person's anus (Muppet), A Reverse Muppet is sticking a hand down another person's throat.
If you keep pissing me off I'll turn you into a Reverse Muppet.
I gave him/her a Reverse Muppet last night.
To reverse muppet is to stick the length of your arm down the throat of who you are reverse muppeting. Then to control them as you would a muppet.
Friend 1-“If you don’t stop doing that I will reverse muppet you”
Friend 2- “Fine I’ll stop talking.”