I believe what the OP is referring to is called "Gain Staqing", and it is a legitimate practice which he is using to compensate on the input end of the iPod's EQ amplifiers for their (the EQ stages) being easily "pumped" enough that the final amplifier sections' inputs become overdriven to saturation (thus, leading to clipping).
"Gain Staging" implies the need that controlling what the input stages receive at each amplifier across several amplifier stages is necessary to keep amplifier stages downstream from becoming overloaded. If the normal iPod EQ's output is emerging "too hot" for the final input stages of the final output/headphone amplifiers (as it seems it is), lowering the input levels somewhat right up front to the EQ stage itself can help.
(It would be helpful if there was a preamp level adjustment in the internal iPod EQ settings as exists in iTune's EQ! That would eliminate the need for this entire discussion!)
How the OP is accomplishing this feat, however, seems cumbersome to many of you here. That does not negate its effectiveness - it is just that there may be another way to do this without having to manipulate the actual files.
In iTunes, one can select a bunch of files and after right clicking on the selection, choose "Get Info" and - after clicking "OK" in response to the warning that asks if you want to edit multiple files - you can edit a parameter called "Volume Adjustment" in the lower left end of the dialog box.
I am wondering if adjusting this a few points in the negative direction will accomplish the same desired result of simply dropping the dB a little BEFORE the input stage of the EQ? It sure would be a quicker fix, and is un-doable, of course. If it only adjusts the final amplifier output AFTER the EQ, it is of no use here, of course. I would be willing to bet the latter describes what does happen, though.... PERHAPS! But, the question remains whether the digital gain adjustment controlled by these meta tags occurs before or after the EQ gain stage?
I have seen mentions here of some tools allowing reduction of file volume (normalizing the entire file to have a lower peak dB output level) but need to see more information. Making this work with Apple Lossless files easily would be an important consideration to the OP, and to anyone else trying to control gain staging to pre-EQ input stages for their Apple Lossless files.
BTW - as to the difference between the "Flat EQ" or the "EQ Off" settings - with the EQ Off setting, the iPod will use the meta tag to the right of the "Volume Adjustment" tag called "Equalizer Preset." It is my understanding that the "Equalizer Preset" tags do nothing unless the EQ is set to "EQ Off" in the iPod. Setting the iPod's EQ to any other setting (including "Flat") overrides any of these custom tags.
I hope this is both accurate and helpful!
Terry