IRS Provides Relief on Dyed Diesel Fuel Excise Tax Penalties
The IRS will not impose excise tax penalties on dyed diesel fuel used on highways nationwide from October 1 through December 31, 2026. Here is what preparers should know.
What the IRS announced
On October 14, 2026, the IRS announced that it will not impose a penalty when dyed diesel fuel is sold for use or used on highways nationwide. The announcement responds to a Executive Order from the President dated October 5, 2026, called Emergency Tax Relief on Diesel Fuel.
The relief is retroactive to October 1, 2026, and stays in effect until December 31, 2026. Any person who sells dyed diesel fuel, or who uses dyed diesel fuel for highway use, can get this relief.
Why this matters for your clients
Dyed diesel fuel is ordinarily not taxed because it goes to an exempt use, such as farming. It would be taxed, however, if it were sold for highway use or used to power a vehicle on the highway. Preparers who work with farmers, truck operators, contractors, and other small-business owners who use diesel should know where that line falls.
Generally, the person liable for the tax is the person who sells dyed diesel fuel at retail. If the fuel was not purchased at retail, the liable person is the operator of the motor vehicle. An example the IRS gives is dyed diesel held in a storage tank on a farm.
What is suspended and waived
During the relief period, the IRS says the following:
- Ordinary procedures for collection and enforcement are suspended.
- No federal inspections of on-road dyed fuel use will take place.
- No penalties related to the excise tax will be imposed on dyed diesel fuel sold for use or used in diesel-powered vehicles on highways nationwide.
- The relief covers penalties for failure to make semimonthly deposits of tax and for failure to maintain adequate records.
- Taxpayers do not need to keep the records that would show they are eligible for relief.
- Sellers and distributors do not have to investigate or document the ultimate end use of dyed fuel sold during the relief period.
What is still open
The IRS expects to issue more guidance on the postponement under 26 U.S.C. 7508A of payment of certain taxes imposed under 26 U.S.C. 4041. It also says it will explore ways to eliminate the obligation to pay any amounts deferred. The announcement does not give those details yet, so do not assume how payment will work.
The IRS also says that forthcoming guidance will explain how this relief applies to Form 720 (Quarterly Federal Excise Tax Return) and any other relevant forms.
What to tell your clients
- This relief applies only for federal tax purposes. It has no effect on state fuel taxes or on penalties a state may impose for dyed diesel used on the highway.
- Many, but not all, states have provided similar excise tax relief. Clients should check with their state agency for the latest guidance.
- If a client receives a penalty notice but believes the relief applies, the client should follow the instructions in the notice or contact the IRS for help.
This relief is temporary and tied to specific dates. Check IRS.gov for updates, especially on Form 720 and the postponement under 26 U.S.C. 7508A, before advising clients on filings or payments.
Informational only, based on the IRS source linked above; not tax or legal advice for a specific situation.