Acceptable gap

How about a shim of strip styrene to fill that?

Don't sand the fuselage, unless it's shape is incorrect.

Strip styrene is what I would do. I would at the strip to the bottom of the stabilizer, then test fit. Add more strip if the gap is still too big, sand the strip if it is too much. Sand and test fit and sand again. You may have to sand/scrape the edge of the strip to be flush with the sides of the stabilizer. When you get a good fit, you can glue it in place.

To answer your first concern, I agree that it does need work.

ok, i started by taking the #11 to the bottom of the tail. It was flat and the fuselage was not. I have it down to this point now and I think this looks good...

Much better! I take it that the entire vertical tail is a separate piece from the fuselage? If so, then yes, working the bottom of the fin to achieve a better fit is you best bet... file/sand, test fit, repeat as needed.

Can you guys explain to me how the 'strip styrene' technique works? I actually have the same problem, on the same plane (Although my is 1/72 scale.) I'm kind of a noob at this hobby (only been doing it a year), and I've heard of this texhnique a lot, but could never wrap my head around how to go about actually doing it. 

Thanks in advance!

There are incredibly thin and narrow strips of styrene available at hobby shops, from Plastruct and Evergreen.  I think they make like .010 x .020 and up.  Those fit in some pretty fine cracks and will ease filling.

Just a thought- for using styrene strips, do you have an old feeler gauge, like we used to have to adjust auto distributor points in the days before electronic ignition?  You can use those to see what is the best thickess of strip you need to fit in the gap.  I always keep an assortment on hand, and just try various strips to find the best one to fill the crack.