Thursday,
October 15, 2026 – The IRS announced Wednesday evening that it will not impose federal
penalties when dyed diesel fuel is sold for highway use or used in
diesel-powered vehicles on public highways nationwide. The announcement
implements President Trump’s October 5, 2026, Executive Order 14435,
“Emergency Tax Relief on Diesel Fuel.”
The IRS announcement states that its penalty relief is retroactive to
October 1, 2026, and remains in effect through December 31, 2026. The
October 1 date comes from the IRS announcement; the Executive Order
itself specifies an October 5 start date. Forthcoming payment-deferral
guidance under Internal Revenue Code § 7508A may track the Executive
Order’s October 5 date, in which case, fuel sold between October 1 and 4
would be free of penalties but would not eligible for any payment
deferral.
Penalties, Inspections and Recordkeeping
Ordinarily, dyed diesel fuel is exempt from federal excise tax
because it is intended for exempt uses, such as farming and in
off-highway machinery. Federal law generally imposes tax when dyed
diesel is sold for highway use or used in a diesel-powered on-highway
vehicle. The retailer that sells dyed diesel for highway use is
generally liable for the tax; where the fuel is not purchased at retail,
such as fuel drawn from a farm storage tank, the vehicle operator is
liable.
During the relief period, the IRS states that it will not impose
penalties related to the federal excise tax on dyed diesel fuel sold for
highway use or used in highway vehicles. This includes penalties for
failure to make required semimonthly tax deposits and failure to
maintain adequate records.
The Service also announced that it will suspend its ordinary
collection and enforcement procedures during the relief period, that IRS
Fuel Compliance Officers will be reassigned to other responsibilities,
and that no federal inspections of on-road dyed-fuel use will occur.
Sellers and distributors are not required to investigate or document
the ultimate end use of dyed diesel fuel sold during this period. The
announcement also states that taxpayers need not maintain records
necessary to substantiate their eligibility for this relief. That
statement concerns eligibility for this particular relief and should not
be read as a general suspension of other business, tax, or recordkeeping
obligations.
The Tax Has Not Yet Been Waived
The announcement does not eliminate the underlying federal
excise tax liability. The IRS anticipates issuing additional guidance
addressing postponement of payments under Internal Revenue Code § 7508A
for taxes imposed under § 4041; that postponement is not yet in effect.
No forgiveness has been granted. The IRS states only that it will
explore avenues to eliminate the obligation to pay deferred amounts, and
permanent forgiveness will likely require legislation. The announcement
also does not address interest on any tax that remains due.
Forthcoming guidance is expected to explain how the relief applies to
Form 720, Quarterly Federal Excise Tax Return, and other relevant forms.
The fourth-quarter Form 720 is due January 31, 2027. Until additional
guidance is issued, marketers should not assume that the
underlying federal diesel tax has been forgiven or that related payment
and filing obligations have been eliminated.
State Taxes and Enforcement
The relief applies only to federal taxes and penalties. It does not
prevent states from imposing their own taxes or penalties for highway
use of dyed diesel fuel. Although many states have announced similar
relief, state requirements vary. EMA members should consult the
applicable state agencies regarding the availability and scope of
state-level relief.
EPA Requirements and the End of the Relief
Period
The IRS relief is not an EPA fuel waiver. Prior IRS dyed-fuel waivers
were limited to fuel meeting the 15-ppm sulfur standard, and dyed
product sold for highway use should continue to meet the ultra-low
sulfur diesel (ULSD) standard. Texas is the exception. EPA's October 5,
2026, emergency waiver suspends the ULSD and Texas Low Emission Diesel
(TxLED) requirements for eligible engines through October 24, 2026.
Higher-sulfur product must be segregated and carry EPA's misfueling
warning.
Federal penalties resume January 1, 2027. Because red dye can remain
in vehicle tanks and retail storage for weeks, marketers should plan the
transition back to clear product.
What Members Should Consider
Keep records anyway. Although the IRS will not require
records to substantiate eligibility for the relief, marketers should
continue tracking gallons of dyed diesel sold to highway vehicles, by
date and location. If the deferred tax ultimately comes due, those
records will be the best defense against an IRS estimate of
liability.
Make a deliberate pricing decision. Retailers that do not
collect the 24.4-cent federal tax at the pump now may find it difficult
to recover from customers later.
Identify who is liable. The announcement does not define
“retail.” For cardlock sales, bulk deliveries into fleet tanks, and
mobile fueling, it may be unclear whether the seller or the operator
owes the tax.
Review contracts. Branded supply agreements, fleet card
product codes, and insurance policies may restrict or affect the sale of
dyed product through highway dispensers.
EMA will continue to monitor Treasury and IRS guidance, particularly
regarding payment postponement, potential tax forgiveness, and the
treatment of federal excise tax returns and deposits.
Click
here to read the IRS news release.
