Key Takeaways

The IRS has implemented temporary federal penalty and enforcement relief for dyed diesel sold for highway use or used in highway vehicles from October 1 through December 31, 2026. However, the IRS has not yet issued the anticipated guidance postponing payment of the underlying federal excise tax or explaining how affected amounts should be reported on Form 720. State fuel taxes, restrictions and penalties remain subject to each state’s rules.

Background

Dyed diesel used on a highway is normally subject to federal excise tax, generally 24.3 cents per gallon, and potentially significant penalties. Generally, the person liable for the tax is the person who sells the dyed diesel fuel at retail or, if the fuel was not purchased at retail, the operator of the motor vehicle (for example, where dyed diesel is held in a farm storage tank).

By contrast, qualifying nontaxable uses, such as off-highway business use and use on a farm for farming purposes, were already exempt from the federal excise tax. Temporary relief can help farmers and other users by allowing them to use dyed diesel on hand in highway vehicles without the usual federal penalties, as diesel prices have risen amid restricted global supply. 

On October 5, 2026, President Trump issued Executive Order 14435, Emergency Tax Relief on Diesel Fuel. The order directed Treasury to determine whether it could postpone payment of certain federal excise taxes imposed that are incurred from October 5 through December 31, 2026. The order also directed Treasury to have the IRS announce that it will not impose penalties when dyed diesel is sold for highway use or used on highways during the temporary relief period and to address penalties for missed semimonthly tax deposits. Treasury was further directed to explore possible avenues, including legislation, to eliminate the obligation to pay deferred amounts. 

IRS Implementation

On October 14, the IRS announced its initial relief plan:

• Relief period: The IRS relief is retroactive to October 1, 2026, and continues through December 31, 2026.
• Eligibility: Penalty and enforcement relief is available to any person who sells dyed diesel fuel for highway use or uses dyed diesel fuel in a diesel-powered highway vehicle.
• Penalty relief: The IRS will not impose penalties related to the federal excise tax on dyed diesel fuel sold for use or used in diesel-powered vehicles on highways during the relief period, including penalties for failure to make semimonthly deposits of tax or to maintain adequate records.
• Enforcement relief: Ordinary federal collection and enforcement procedures will be suspended, and the IRS will not conduct federal inspections of on-road dyed-fuel use during the relief period.
• Recordkeeping: The IRS stated that taxpayers do not need to maintain records to substantiate eligibility for the federal relief, and sellers and distributors are not required to investigate or document the purchaser’s ultimate use of the fuel sold during the relief period. 

Additional Guidance Expected

The IRS stated that it anticipates issuing further guidance addressing:

• Payment postponement of the taxes in question
• How the relief applies to Form 720, Quarterly Federal Excise Tax Return, and other relevant forms
• Avenues the IRS will explore to eliminate the obligation to pay amounts that may be deferred

Until further guidance is issued, businesses should distinguish the penalty and enforcement relief now available from the potential payment postponement or elimination. The federal announcement also does not change state fuel taxes, dyed-fuel restrictions or penalties, as they have their own rules. However, the IRS noted that many, but not all, states have provided similar relief. 

We will continue to monitor developments and provide updates as they occur. Please reach out with any questions as to how this may impact you or your business. 

Published: 10/20/2026

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