I assume you meant you set up a wallet on a crypto exchange. In that case, the exchange has full view and control over your deposited funds and your identification documents. They are also going to give that information to your government. And if they decide to freeze your account and your funds, there will be nothing you can do to stop them.
Most likely he means a central exchange, especially since he says that he used an American passport, an American tax identification number, and an American bank account. This means that he completed the KYC on a central exchange.
If this is true, then it is unfortunate that he does not know the difference between a wallet and a central exchange, or perhaps there is a possibility that he used a central wallet, which is bad in both cases, especially since he is thinking about tax evasion.