Can I format the internal HDD in my iMac if using an external drive for the OS?
is it possible to format this so I can use it for backup storage?

Definitely. You can use Disk Utility for that.

Is there any advantage to keeping this internal drive as is with the OS files that are not used on there?

An advantage is that you'll be able to boot the machine if the external drive ever fails.

would they be required for recovery in future?

I suggest that you leave the Recovery partition alone and only reformat Macintosh HD.