Bypass hose and fitting dilemma

I'm assuming this is because the 3/4npt nipple has the same tube diameter as the 1" hose, and your not dealing with barb size?

Yes 3/4 is pretty close to 1" OD

On a side note, 1/8 is close enough to 3/8OD that you can use it sometimes for fuel connections, and 3/8 is close to 5/8 for heater hose use.