On Oct. 21, the Internal Revenue Service announced it will provide temporary relief from reporting and recordkeeping requirements related to federal excise taxes on dyed diesel used on highways. 

As the press release explains, “In administering the requirements prescribed under sections 6001 and 6011, the IRS will not challenge temporary failures to meet return-filing, reporting or recordkeeping requirements solely attributable to liability under section 4041(a) arising from taxable uses of dyed diesel occurring on or after Oct. 1, 2026, and before Jan. 1, 2027. This relief includes filing Form 720 solely to report that liability, reporting that liability on an otherwise required Form 720, and creating or maintaining records solely to substantiate that liability. The IRS will not assert civil penalties or additions to tax solely for failures covered by this announcement.”

The IRS also acknowledged concerns about residual red dye remaining in fuel tanks after the relief period ends and is considering a grace period or other measures to address potential compliance issues. Additional guidance is expected to follow. 

Background:

On Oct. 5, President Donald Trump signed Executive Order 14435, Emergency Tax Relief on Diesel Fuel to temporarily allow off-road “dyed” diesel for highway use and defer the applicable federal excise tax.

According to a White House fact sheet, the EO does the following:

• “Directs the Secretary of the Treasury, in consultation with the Secretary of War, to defer payment of the Federal excise tax imposed for on-road use of dyed diesel fuel for the remainder of the year without interest or penalties, and to explore pathways to eliminate the obligation to pay the deferred taxes.
• “Directs the Secretary of Transportation to coordinate with states, industry leadership and labor organizations on access to dyed diesel. 
• “Directs the Director of the White House Office of Intergovernmental Affairs to encourage more States to adopt policies that correspond with the Secretary of the Treasury’s actions pursuant to this Order.” 

As the fact sheet explains, “Diesel is taxed based on its intended use. ‘On-road’ or highway diesel is subject to state and federal excise taxes. Diesel used for off-road purposes, such as agricultural, construction, or heating, is not taxed. This off-road diesel is dyed red so that law enforcement can identify it to enforce penalties and back taxes for on-road use.”

Importantly, the EO does not automatically waive applicable state red-dye diesel fuel taxes or penalties. Each state must independently decide whether to provide corresponding relief under its own laws. To date, several states have taken action. Some are providing state fuel tax relief, while others have temporarily waived penalties for using dyed diesel on public roads. The availability and scope of relief varies by state.

The EO directs the Treasury Department to issue implementing guidance, which was issued by the department on Oct. 14.

According to the release, “This relief only applies for federal tax purposes. It has no effect on state fuel taxes and penalties that a state may impose on the use of dyed diesel fuel on the highway. Many, but not all, states have provided similar state excise tax-related relief. Taxpayers are encouraged to refer to their applicable state agencies for the latest guidance on state-level relief.”

“The IRS is waiving all federal penalties on the highway use of red-dyed diesel from Oct. 1 (retroactively) through Dec. 31, 2026,” said ABC economist Zack Fritz. “The $24.4-cent federal excise tax is still technically owed, and details on the deferral will be set forth in still-to-come IRS guidance.

“Because this is a deferral rather than a full reprieve, the real-world impacts will be extremely limited, especially because retail gas stations rarely carry red-dyed diesel (a product usually delivered directly to farms),” said Fritz. “More importantly, this order does not address the supply constraints that have driven diesel prices higher.”

ABC members are encouraged to contact their counsel regarding the Emergency Tax Relief on Diesel.