That rag is covering a breather that's supposed to feed into the intake pipe. The IACV also takes air from the intake pipe (that's what's connected on your's). But that Injen intake only has one port, so the previous owner had to "pick one". One choice and the engine doesn't run properly. The other choice, the car "just" pollutes more and stinks up your cabin with oil vapor. So I kinda understand why they did it. Here's a pic of someone using a tee to connect both the breather and IACV to that single port on the Injen intake.
To re-size, re-upload the pics to Imgur, then click edit. Then you can change the size, save, and use those links.
