The IRS announced nationwide relief from highway excise tax penalties for dyed diesel fuel, acting in response to an October 5 executive order. The relief is retroactive to October 1, 2026, and will remain in effect through December 31, 2026. (IR 2026-122, 10/14/2026)
Dyed diesel fuel tax treatment
Under normal compliance rules, dyed diesel fuel is exempt from excise taxes because it is designated for off-highway business use, such as farming. However, selling or using dyed diesel fuel to power vehicles on public highways ordinarily triggers excise taxes and penalties.
Executive Order 14435, “Emergency Tax Relief on Diesel Fuel,” directs the Treasury Secretary to “use his authority to defer certain diesel fuel tax payment obligations and to provide penalty relief to the extent permitted by law.” Specifically, the executive order calls on the Treasury Secretary to direct the IRS to announce it will suspend penalties under IRC § 6715(a)(1) and § 6715(a)(2) for certain uses of dyed diesel fuel.
Suspension of penalties, highway inspections
To comply with the executive order, the IRS has issued IR 2026-122, which provides penalty relief to any person who sells or uses dyed diesel fuel for highway use during the designated three-month window.
During the relief period, the IRS will suspend its ordinary collection and enforcement procedures. The agency is reassigning all fuel compliance officers to other responsibilities, and no federal inspections of on-road dyed fuel usage will occur.
Retailers, distributors, and operators are also relieved of their typical recordkeeping obligations during this period. Taxpayers do not need to maintain records to substantiate their eligibility for this relief, and sellers are under no obligation to investigate or document the ultimate end-use of any dyed diesel fuel sold.
The relief explicitly covers penalties for failing to make semimonthly tax deposits or failing to maintain adequate records.
Future guidance on tax deferrals, reporting
The IRS plans to issue additional guidance regarding the postponement of diesel fuel tax payment obligations under IRC § 7508A. This forthcoming guidance will specifically address taxes imposed by IRC § 4041(a)(1)(A) and § 4041(b)(1)(B) that are incurred during the suspension window.
The IRS also plans to clarify how the relief affects Form 720, Quarterly Federal Excise Tax Return, and other relevant tax forms. Taxpayers who receive penalty notices despite qualifying for relief should follow the instructions on the notice or contact the IRS directly.
The executive order also directs Treasury to explore administrative and legislative avenues to eliminate the obligation to pay these deferred amounts entirely.
Federal relief does not affect state taxes
The federal penalty relief applies strictly to federal tax liabilities and compliance measures. It has no effect on state fuel taxes or any state-level penalties that may apply to the highway use of dyed diesel fuel.
Although many states have enacted corresponding excise tax relief, some have not. The IRS urged taxpayers to consult their respective state tax agencies for the latest guidance on state-level rules.
For more on excise-tax-related penalties for improper use or sale of dyed diesel fuel, see Checkpoint’s Federal Tax Coordinator 2d ¶ V-2733.
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
