Formaldehyde is used in the process of making fabrics wrinkle free. Any wrinkle free cotton clothing that you see, not just from Walmart, is soaked in formaldehyde
It's not legal to make the fabric in the US., but the fabric can be imported and then made into clothing in the US. Wrinkle free clothing can be imported.
http ://en.wikipedia.org/wiki/Wrinkle-resistant_fabric