Have you expanded the trace before trying to fill it?
Yes, could it have anything to do with me not creating layers properly?
No, it doesn't have to do with layers. Maybe you should show the traced objects.
just to check here are the steps i am performing...
scan into jpeg
open in Ps 5
save as .eps
open in illustrator
run live trace
There is no need for EPS before importing the image into Illustrator. That's just silly wasted effort. EPS is a "meta format"; just think of it as a "box" or a "wrapper" into which you can drop a bunch of different object types (raster images, vector paths, text) that can be understood by a PostScript device. You can import the raster image (JPEG, whatever) directly into Illustrator. There is no need for it to be contained in an EPS "wrapper."
Forget Layers. You're just confusing yourself. Has nothing to do with your problem.
...obviously im missing a step.
Bluntly, the step you are missing is reading the operator's manual. You're relying on cheezy online "tutorials" in an effort to use a rather complicated program without having to understand it.
I then go to live paint to select areas to fill...
What does that mean; you "go to live paint"? State exactly what you are doing; click-by-click, tool-by-tool, command-by-command. Use the terminology of the program. (Tool tips tell you the names of the tools.)
ALWAYS state what version of the program you are using.
This was done by merely copying your screenshot from your forum post and pasting it into CS3:
I did everything the same in CC5.
I am very disappointed! I just bought CS6 and could not do the same in the live trace that I did in CS5
They have changed the autotrace function. But you can still trace stuff, expand and then use live paint on it.
Read the manual.
Just give me back my options and ignore white. I want to have control over my decisions
It's all there: options and "Ignore white"
Read the manual
Or in so many words:
Read The Fine Manual.