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Should I plug the small hole on the false wall?

YES.  We recommend closing off small hole in chamber one.  The basket will butt up against it but some water will still enter.  Closing off the hole greatly increases the flow into the top of the Media Basket.  inTank manufactures a plug, you can purchase HERE

 

Water is backing up in the Media Basket, what's up with that?

Do not over fill the Media Basket.  Blocking too many holes in the Basket with media bags will reduce passing flow.  Use smaller amounts of media.  Change filter floss regularly and feed with the filtration pump(s) off as to not suck too much food into the filter floss.