Regulatory Alert

IRS Announces Temporary Penalty Relief for Highway Use of Dyed Diesel Fuel

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.