IRS announces temporary excise tax and enforcement relief for dyed diesel fuel

ARTICLE | November 02, 2026

The IRS recently announced temporary federal excise tax enforcement relief for dyed diesel fuel used on public highways. The relief applies nationwide from October 1 through December 31, 2026, and may benefit farmers, trucking companies, construction businesses, and other diesel-powered vehicle operators.

The announcement follows an October 5 executive order directing the Treasury Department to provide temporary relief from certain federal fuel taxes and penalties. On October 21, the IRS issued additional guidance addressing related reporting and recordkeeping requirements.

What does the relief cover?

Dyed diesel is generally exempt from federal fuel excise tax when used for qualifying off-road purposes, such as operating farm equipment. Using that fuel in vehicles on public highways would ordinarily trigger federal excise tax and potential penalties.

During the relief period, the IRS has announced that it will:

• Waive federal penalties for selling or using dyed diesel fuel for highway use.
• Suspend federal inspections of on-road dyed diesel usage.
• Waive certain penalties related to missed tax deposits and inadequate records.
• Eliminate the requirement for sellers and distributors to investigate or document the fuel's ultimate use for purposes of this relief.
• Provide relief from certain Form 720 filing, reporting, and recordkeeping requirements related to federal excise tax liabilities arising from covered dyed diesel use.

For example, a farming operation that uses dyed diesel from its storage tank to fuel a truck driven on public roads would ordinarily face federal excise tax consequences. Under the temporary relief, the IRS will not impose the applicable dyed fuel penalties for that use during the covered period.

Does this eliminate the federal excise tax?

Not necessarily. The IRS has indicated that additional guidance is forthcoming on postponing excise tax payments and potentially eliminating deferred tax obligations.

However, the October 21 announcement clarifies that businesses will not be penalized for certain failures to file Form 720, report covered dyed diesel excise tax liabilities, or maintain records solely related to those liabilities. This relief applies to qualifying dyed diesel use during the October 1 through December 31 period, even if the applicable filing deadline falls after year-end. Businesses also will not be required to file those reports retroactively or reconstruct the related records after the relief period ends.

These provisions specifically address liabilities under Internal Revenue Code Section 4041(a). Businesses that must file Form 720 for other excise tax liabilities must continue meeting those obligations.

Importantly, the announcement applies only to federal taxes and penalties. State fuel tax requirements may still apply, depending on the state.

What should businesses do now?

Businesses that purchase, distribute, or use dyed diesel should monitor forthcoming guidance to better understand how this relief may affect their operations.

Keep in mind that the federal relief does not override state fuel tax rules or applicable EPA fuel standards. Additional IRS guidance is also expected, particularly regarding the treatment of underlying excise tax liabilities and potential relief for residual red dye remaining in vehicle fuel tanks after December 31, 2026. The IRS has acknowledged this concern and is considering a grace period or other measures, although no additional relief has been finalized.

For now, this is a development worth watching. Before making any significant decisions, consult your tax advisor and other relevant advisors to understand the potential benefits, requirements, and risks for your business.