You have the right idea with the bypass system. Normally, you will want a 3 line tank setup. One for feed, one for return, and one for vent. The feed is the clunk, the vent is standard, and the overflow is a hard line like the vent, but it is turned down and touching the bottom of the tank, towards the front. That way the flow back into the tank won't interfere with the pickup at the rear of the tank.

When you run the bypass system, you need the pump set to max flow, and you may still need to restrict the return line to get enough pressure at the needle. I use a wheel collar, and adjust the set screw to restrict the line.

Make the T for the bypass line as close to the needle valve as possible.

A one way valve is nice to have in the return line, so you can add another T in that line for filling and draining the tank. Without the one way valve, you need to close the needle valve for filling and draining.

Tank position is not an issue with this setup.

It works like a charm on my OS 1.08.