The IRS issued guidance for taxpayers to recover federal excise tax paid on clear diesel fuel or kerosene that is later removed from a terminal as dyed fuel for a nontaxable use. The temporary and concurrent proposed regs limit the claimants to the person that paid the original fuel excise tax to the IRS. (IR 2026-59; T.D. 10047; REG-119294-25, 4/30/2026)
Background
The federal excise tax under IRC § 4081 is imposed on the removal of taxable fuel from a terminal. In some industry situations, previously taxed clear fuel is returned to the bulk transfer/terminal system and then removed a second time. While a refund mechanism has long existed for fuel that was taxed twice for taxable uses, there was previously no method for a taxpayer to recover the first tax if the fuel was later dyed and removed for a nontaxable purpose.
To address this, the One Big Beautiful Bill Act (OBBB) added IRC § 6435. This provision establishes a statutory refund mechanism for fuel removed on or after December 31, 2025. After the law’s passage, the IRS issued Ann. 2026-1, which requested that taxpayers hold any claims under the new law until formal guidance could be developed and released. This new set of regs provides that anticipated guidance.
New Guidance Clarifies Who Can Claim Refund
The temporary regs clarify that only the person who both originally paid the IRC § 4081 tax on the fuel and later removes that same fuel from a terminal as eligible dyed fuel may file for the refund. The guidance explains that while IRC § 6435 created the payment mechanism, it did not include a specific appropriation for making the payments.
As a result, the Treasury and IRS determined that they lack the statutory authority to pay these claims to anyone other than the original taxpayer. The agency’s authority rests on the general refund statute, IRC § 6402, which permits a refund of an overpayment only to “the person who made the overpayment.” The new regs therefore construe the payment under IRC § 6435 as a refund of an overpayment, which restricts eligibility to the taxpayer that originally paid the tax.
The guidance was issued in the form of temporary regs to provide immediate clarity for the fuel industry. The Treasury and IRS noted that because the rules limit claims to the taxpayer that originally paid the tax, businesses need certainty as soon as possible to structure their commercial arrangements in a way that preserves eligibility for the dyed fuel payment.
How to File a Claim
To file a claim for a dyed fuel refund, taxpayers must use an updated Form 8849, Claim for Refund of Excise Taxes, and include a completed Schedule 5 (Form 8849). These claims are valid for removals of eligible dyed fuel that occur on or after December 31, 2025.
To be eligible for the refund, the claimant must establish that the diesel fuel or kerosene was previously taxed and that the tax was not already credited or refunded. The claimant must also prove that the fuel was indelibly dyed by mechanical injection and removed from an approved terminal for a nontaxable use, and that the claimant is the same taxpayer who paid the original fuel excise tax.
The new rules require the claimant to file a special report with the claim. This report is similar to existing requirements for other fuel tax refund claims and requires the taxpayer to declare that they have not and will not receive a credit or refund for the tax elsewhere. This report will also serve to identify and revoke any “first taxpayer’s report” that may have been previously filed for the same fuel, an approach intended to reduce administrative burdens and prevent duplicate reporting.
Effective Date, Request for Comments
Because the IRS stated a need to provide clarity for taxpayers to file claims and structure business arrangements as soon as possible, the temporary regs are effective immediately. The temporary regs will expire May 1, 2029, or upon any statutory change that would appropriate funds for claims by persons other than the original taxpayer.
The accompanying notice of proposed rulemaking invites public comments on the rules. With a 60-day deadline, comments are due June 30. Comments can be submitted either electronically via the Federal eRulemaking Portal or by mail.
For more on the dyed fuel tax, see Checkpoint’s Federal Tax Coordinator 2d ¶ W-1500.
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.
