The Itouch app, called iPeng ($10 on iTunes app store) is format-agnostic (i.e it doesn't care). But FLAC is a good choice, especially if you want to save some disc space, and it stores metatdata (album art, tags, etc) better than some other formats...although in Squeezebox Server land, the server does a nice job of storing that info anyway. If you use WAV or AIFF the workload is a little greater cuz you need to point a jpeg (album art) to SqueezeBox Server via either a naming convention like folder.jpeg or cover.jpeg (per album folder).
Net/net, use FLAC unless you find a problem with it. It saves HD space, stores metatdata well, sounds great, and Squeeze products read it natively.