If you look inside your tank you will see that there is a box inside the tank. The box is rectangular and can be removed via the rectangular hatch where you removed the sender. Your sender doesn't reach the bottom of the tank and neither does your fuel pickup. They reach the bottom of that box.
The sender has 8 little mercury switches that change when the magnet is above them. Your fuel gauge should change in 1/8 increments. (F, 7/8, 3/4, 5/8, 1/2, 3/8, 1/4, 1/8, E) Any resistance on the negative wire/contacts or lower voltage on the positive will result in lower readings at the gauge. While the sending unit is out of the boat, move the float up and down and watch your gauge.
Play around with it a bit, and make sure your connections are good as is your voltage.
'96 ProStar 205 SD LT-1