Illustrator CS6 auto trace including border

In Illustrator CS6, Auto trace is tracing including the bounding line in its trace. I take the trace, paste it back into Photoshop using paste paths. When I do a fill, it is filling the outsides of my art, not inside the lines. So, basically, I end up with a black rectangle since the original lines are still there.

This causes other problems. In Photoshop, select a black ring with magic wand tool, then cut and paste it into Illustrator. Essentially you have a transparent background. When trace gets to close to the top, it starts tracing back along the border instead of closing the ring. So all four of the sides have a flat spot in addition to the above problem. I got past the flat sides by importing images with a white background making that border be away from my lines a little. Still it was a pain for a newbe.  That problem should go away if I get the first problem fixed.

So, Is there a setting or something that I am missing?

If I paste it into Photoshop as a smart object, it works.   But I have been trying to get a vector to work there.  So far no luck.  I have watched a bunch of videos and no one else seems to be having this problem but me.