To chose the correct answer, start with an understanding of the stimulus and common LSAT argument types. Taylor offers the evidence that family and friends often know our thoughts and feelings and concludes that telepathy is the explanation. Therefore, this is an argument that is based on the interpretation of evidence.
Since you are asked to critique Taylor's argument, you are being asked to critique her interpretation of evidence. (E) cannot be correct, because as you point out (E) hearkens to circular reasoning.
(B), the correct choice, points out that there might be a better interpretation for the evidence than telepathy. The readily apparent highly plausible explanation referenced by (B) is that familiarity, not telepathy, explains why we know what our friends and family are thinking and feeling. However, you do not need to home in on that explanation, all you need to do is to understand that Taylor's argument is an interpretation of evidence.
It is important not to create your own straw man or overly harsh reading of an LSAT stimulus while you are analyzing the argument. Remember, you are supposed to hold to commonsense standards. It is very common for people to talk about how friends and family know what they are thinking and how they are feeling. When Taylor says this, you should not assign her a highly unusual meaning for that common sentiment. Accepted at face value, all she did was offer a bad explanation of the evidence.