IRS waives tax penalties for dyed diesel fuel sales

• Key insight: See why the IRS is suspending federal tax penalties on dyed diesel fuel sales.
• What’s at stake: Taxpayers facing potential state-level penalties despite the newly announced federal excise tax suspension.
• Forward look: Expect the IRS to issue further guidance and explore eliminating deferred tax payment obligations.

The Internal Revenue Service is providing relief on federal taxes and tax penalties on sales of dyed diesel fuel in response to an executive order from President Trump.

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Last week, Trump signed an executive order easing restrictions and deferring payment of federal excise taxes on the use of a tax-exempt variety of diesel in an effort to reduce fuel costs ahead of next month’s midterm elections, while waiving interest and late-payment penalties on the deferred federal excise tax amounts during this period.

The IRS said Wednesday the relief is retroactive to Oct. 1, 2026, and will remain in effect until Dec. 31, 2026. It’s available to anybody who sells dyed diesel fuel or uses dyed diesel fuel for highway use. 

The IRS noted that, ordinarily, dyed diesel fuel isn’t subject to tax because it’s destined for an exempt use, such as use on a farm for farming purposes, but it would be taxed if it’s sold for highway use or used to power a vehicle on the highway. Generally, the person who is liable for the tax is the one who sells dyed diesel fuel at retail or, if the dyed diesel fuel is not purchased at retail, the operator of the motor vehicle (such as dyed diesel fuel held in a storage tank on a farm).

During the relief period, ordinary procedures for collection and enforcement will be suspended, according to the IRS. All IRS Fuel Compliance Officers will be re-assigned to other responsibilities, and no federal inspections of on-road dyed fuel usage will occur. During the relief period, taxpayers won’t need to maintain any records to substantiate their eligibility for relief. 

The IRS said it won’t impose any penalties related to the excise tax for dyed diesel fuel sold for use or used in diesel-powered vehicles on highways nationwide during the relief period. The relief includes penalties for failure to make semimonthly deposits of tax or to maintain adequate records. Sellers and distributors won’t be under any obligation to investigate or document the ultimate end-use of dyed fuel that’s sold during the relief period.

Taxpayers who believe they qualify for relief but receive a penalty notice should follow the instructions outlined there or contact the IRS for help.

The IRS expects to issue further guidance on the tax postponement and plans to explore ways to eliminate the obligation to pay any deferred amounts. Further IRS guidance will provide details on how this relief applies to Form 720 (Quarterly Federal Excise Tax Return) and any other relevant forms. 

The IRS cautioned that the relief only applies for federal tax purposes but has no effect on state fuel taxes and penalties that states impose on the use of dyed diesel fuel on the highway. Many, but not all, states have provided similar state excise tax-related relief, however, and the IRS is encouraging taxpayers to check with relevant agencies in their states for the latest guidance on their relief.

Introductory bullet points created by AI with editorial review.