This is the best answer. It depends on the headphones or speakers you're using.
The iPod Touch reproduces sound pretty well according to how the sound engineer intended the recording to be. If you have good speakers or headphones that also reproduce sound accurately, then you should leave the EQ OFF. If you have headphones or speakers that are bass heavy, you may want to reduce the bass for more accurate reproduction. If you have speakers or headphones that have weak treble, you should increase the treble, etc.
That is, if you want to hear the songs as they were recorded.
Some people do, however, have a preference for a sound that does not accurately represent how the original recording was meant to sound. For instance, they might prefer a bass-heavy sound, or they have damaged hearing that makes it more difficult to hear treble, and they might want to raise those bands accordingly.
Originally Posted by Sparkee
EQ settings are more of a personal preference and the results can vary widely depending on the speakers or headphone you have plugged in. I usually leave my iPod's EQ turned off but may turn on Deep or other bass enhancing setting when using my noise canceling Sennheiser PXC 250 headphones. I use the controls on my cars head unit or other speakers to fine tune the sound when connected to them.