The filter belongs in the engine compartment. I work on some of the local TRs around here and you'd be surprised at what I've seen. One guy had an old ATR setup that mounted the filter down low, near the bumper. His turbo was super slow to spool. I got to checking things and the inlet bell was caked with a mud-like substance necking it down to about 1". Even the compressor wheel was coated which I didn't know was possible. Leave the filter in the engine compartment and run some ducting to it for cold air. I like the old Kenne Bell system which used 4" plumbing from the cold air source with a loose fitting cannister around the filter which was mounted to the MAF. It allowed dust and water to blow past the filter and it would be nearly impossible to hydrolock the motor with that setup.