Thursday,
October 22, 2026 – Yesterday evening, the IRS took another significant step to implement
Executive Order 14435, “Emergency Tax Relief on Diesel Fuel.” In IR-2026-125,
the IRS announced that, for taxable uses of dyed diesel occurring from
October 1, 2026 through December 31, 2026, it will not challenge
temporary failures to meet return-filing, reporting, and recordkeeping
requirements solely attributable to liability under Internal Revenue
Code § 4041(a).
EMA appreciates that the White House reached out to EMA directly for
its views and its members’ concerns. Members’ most frequent question was
whether sellers who were told they need not track end use would later
have to report a tax they had no way to calculate. The October 21
announcement responds directly to that concern, although the ultimate
treatment of the underlying tax and any interest remains open.
Background
Executive Order 14435, signed on October 5, directs Treasury to
provide penalty relief for highway use of dyed diesel and, to the extent
authorized by law, to postpone payment of the related federal excise
tax. In IR-2026-122 (October 14), the IRS made penalty relief
retroactive to October 1, stated that sellers need not investigate or
document end use, and identified the person generally liable as the
retail seller or, absent a retail sale, the vehicle operator. The IRS
also said it anticipates guidance postponing payment under § 7508A and
will explore ways to eliminate the deferred obligation.
Section 4041(a) generally imposes a backup tax on diesel fuel not
previously subject to the federal highway fuel tax under § 4081. The tax
can arise when untaxed diesel is sold for highway use, in which case the
seller is liable (§ 4041(a)(1)(A)(i)), or when untaxed fuel is used in a
highway vehicle without a prior taxable sale, in which case the user is
liable (§ 4041(a)(1)(A)(ii)). The rate is generally 24.4 cents per
gallon, including the 0.1 cent per gallon LUST tax where applicable.
What IR-2026-125 Provides
The new relief covers three things: filing Form 720 solely to report
the covered liability, reporting it on an otherwise required Form 720,
and creating or maintaining records solely to substantiate it. The IRS
will not assert civil penalties or additions to tax for covered
failures. The relief applies even where a filing deadline falls after
December 31, and no later filing, reporting, or reconstruction of
records will be required. EMA members need not build tracking systems or
reconstruct gallons at year-end solely for the covered liability.
Legal Analysis
1. Reporting relief, not tax forgiveness. The IRS acted
under its authority to administer the return and recordkeeping
requirements of §§ 6001 and 6011. The release does not amend § 4041 or
state that the underlying tax has been eliminated. Nor does it address
when any covered tax would become payable, whether interest would
accrue, or how the § 7508A postponement will operate. As a news release,
it announces the IRS’s administrative position, which taxpayers may
reasonably take into account, but it does not itself postpone or
eliminate the statutory obligation. Until further guidance is issued,
EMA members should describe the action as relief from filing, reporting,
and recordkeeping, not as forgiveness of the tax.
2. Statutory scope. The release covers § 4041(a). The
October 14 release also referred to § 4041(b)(1)(B), so members should
not assume liabilities under other provisions are covered. The release
describes liability “arising from taxable uses,” but § 4041(a)(1)(A)(i)
also imposes liability on retail sales. EMA understands the relief to
encompass both qualifying retail sales and taxable uses under § 4041(a),
consistent with the IRS’s October 14 announcement, and will request
confirmation of that interpretation.
3. Other Form 720 obligations and records continue. EMA
members must continue to file Form 720 and keep records for all other
liabilities and for refund, credit, and exemption claims (Forms 8849 and
4136 and Form 720 Schedule C). Ordinary business records such as
invoices, bills of lading, and delivery tickets should be retained as
usual.
4. State law is unaffected. The federal relief applies only
to federal tax. It does not change state motor fuel taxes, state
restrictions on highway use of dyed diesel, or state and IFTA reporting
and recordkeeping requirements. Because those restrictions and taxes are
set by state law, any relief from them must come from the state itself.
That relief typically comes through a governor’s executive order or
emergency declaration, legislation, or action by the state’s revenue or
enforcement agencies. Where a state has not acted, its dyed-fuel
restrictions, taxes, and penalties continue to apply in full, and a
highway sale of dyed diesel may violate state law even though federal
penalties are waived. Where states have acted, relief varies widely:
some limit it to agricultural or forestry use, and others suspend
enforcement while still requiring the state tax. EMA will publish a
separate summary of state actions.
5. Residual dye and fuel quality. The IRS has acknowledged
concerns about residual red dye in fuel tanks after December 31 and is
considering a grace period. Nevada has already said it will continue
suspending enforcement after the federal order expires long enough for
residual dye to dissipate, and EMA has encouraged a comparable federal
approach. The tax relief does not affect EPA fuel standards, including
ultra-low sulfur requirements for highway diesel.
Recommended Steps for EMA Marketers
Continue filing Form 720 for all other liabilities and keep
ordinary business records in the normal course.
Confirm the law of each state in which you operate before making
highway sales of dyed diesel. Federal relief does not authorize a sale
that state law prohibits.
Describe the federal action accurately to customers. While
penalties are waived and reporting and recordkeeping obligations are
relieved, the underlying federal tax has not been forgiven.
Review customer contracts and invoices for tax pass-through terms
and consult your accountants and tax advisors about potential liability
during the relief period.
Plan for the end of the relief period, and watch for federal and
state guidance on residual dye.
EMA’s Continuing Work
EMA thanks the White House for seeking EMA’s views, and Treasury and
the IRS for their prompt work. EMA will keep members informed as further
guidance is developed.
This alert is provided for general informational purposes and
does not constitute legal or tax advice. Members should consult their
own tax advisors regarding their specific circumstances.
For questions, contact EMA Regulatory Counsel Jeffrey L. Leiter
(jleiter@bmalaw.net) or Jorge Roman
(jroman@bmalaw.net).
