When I first started quilting in 1980 they used formaldehyde to set the colors in fabric. I could barely stand to be in the quilt shop for any length of time. The only solution is to wash them and then air them. I would put the fat quarters in a sink with Borax and color catchers and let them soak for 15-20 minutes. Rinse them with baking soda and then clear water. That should remove the odor.