Petcock is leaking out the atmosphere valve
 

I assume you mean the atmosphere vent protruding from the bottom of the petcock. I think the only way it could leak is if the diaphragm is torn or incorrectly seated.

You probably know this but, I found it much simpler with either the petcock removed or at least the tank off and upside down. This makes centering the diaphragm and compressing the spring much easier.
It only takes a micro pin hole for fuel to leak through. Usually anything bigger (rip, etc.)will cause noticeable fueling problems.