Often the formaldehyde forms as dyes decompose. Organic is a term used to how cotton is grown (hubby's family are cotton farmers). There are a few genetically enhanced cotton strains that are colored but are very limited in color.
Unfortunately for consumers, formaldehyde is usually not listed as an ingredient because it is used to synthesize a different chemical. Kind of like using LEGOS to build something like a LEGO house. You can call it a house but when you decompose it the thing turns back into LEGOS. This isn't the greatest explanation but my excuse is the late hour. I ususally explain organic synthesis when I can draw pictures on the board.