Regulatory Alert

IRS FAQs Clarify Dyed Diesel Relief: Seller Liability, Form 720, and LUST Tax

Monday, October 26, 2026 – On October 23, 2026, the IRS issued 11 Frequently Asked Questions (FAQs) on the temporary federal excise tax relief for dyed diesel sold for use or used on the highway from October 1 through December 31, 2026. The FAQs supplement IR-2026-122 and IR-2026-125 and answer several questions raised by EMA members. EMA appreciates the Administration’s continued engagement with the industry.

Key Clarifications

1. Seller presumption. During the relief period, sellers are presumed not to know or have reason to know that dyed diesel is used in a highway vehicle (FAQ 7). For purposes of the temporary relief, this presumption protects sellers from Internal Revenue Code § 4041(a) liability arising solely from a customer’s subsequent highway use. It does not constitute forgiveness of the underlying tax.

2. No Form 720 reporting or recordkeeping. Covered dyed diesel transactions need not be reported on Form 720, including fourth quarter returns otherwise due February 1, 2027 (January 31 falls on a Sunday), and records need not be kept or later reconstructed solely to substantiate § 4041(a) liability (FAQs 1–3). Filing and recordkeeping for other taxes, exemptions, credits, and refunds continue.

3. LUST tax. The $0.001-per-gallon LUST tax still applies when dyed diesel leaves the terminal, but it is not imposed again on later highway sale or use (FAQ 10).

4. Scope. The relief covers dyed biodiesel mixtures but not clear diesel or dyed kerosene, and it creates no new obligations for distributors, retailers, purchasers, or end users (FAQs 4, 8, 9).

5. Dyed-fuel notices. “Nontaxable use only” notices (signs) required by Treas. Reg. § 48.4082-2 need not be retained during the relief period but must be restored on January 1, 2027 (FAQ 11).

6. Residual dye. The IRS is considering a grace period for dye remaining in tanks after December 31, but none has been announced (FAQ 6). EMA members should plan as though ordinary enforcement resumes January 1.

7. State law. The federal relief does not affect state fuel taxes or dyed-fuel rules, including for interstate travel (FAQ 5). EMA members should confirm requirements with each state.

Open Questions

The IRS has not eliminated the underlying tax. IR-2026-122 framed the relief as a postponement of payment under § 7508A and said only that the IRS would explore eliminating deferred amounts, so the disposition of any deferred tax and interest remains unresolved. EMA continues to press the White House, Treasury, and the IRS on this issue and the year-end transition.

EMA members should retain ordinary commercial records and copies of the IRS FAQs and related releases. Although FAQs not published in the Internal Revenue Bulletin are not precedential authority, reasonable, good-faith reliance on them may provide protection against penalties for which reasonable cause is a defense.

For questions, contact EMA Regulatory Counsel Jeffrey L. Leiter (jleiter@bmalaw.net) or Jorge Roman (jroman@bmalaw.net).

This alert is provided for general informational purposes only and does not constitute legal or tax advice.