IRS Weighs Tax Relief for Red-Dyed Diesel

The IRS has temporarily suspended federal penalties for selling or using red-dyed diesel fuel on public highways nationwide. The relief applies retroactively from Oct. 1 through Dec. 31, 2026, but it does not eliminate the underlying federal excise tax or affect state fuel-tax requirements.

Penalty relief applies nationwide

The IRS announced Oct. 14 that it would not impose federal penalties when dyed diesel is sold for highway use or used in diesel-powered vehicles on public highways during the relief period.

The policy implements an executive order directing the agency to suspend certain enforcement actions involving dyed diesel. The relief is available to any person who sells dyed diesel fuel for highway use or operates a vehicle using the fuel on highways.

During the temporary period, the IRS said it will suspend collection and enforcement activities related to the covered use of dyed diesel. The agency also will not impose penalties for failing to make semimonthly tax deposits or for failing to maintain adequate records related to the fuel.

Underlying tax remains in place

The IRS clarification waives penalties, but not the federal excise tax owed on diesel fuel used for highway purposes. The agency has not postponed the payment of those taxes.

Red-dyed diesel is generally intended for nontaxable off-road uses, including construction equipment and other machinery. Using it in an on-highway vehicle ordinarily triggers federal fuel-tax obligations and potential penalties.

In a 2019 emergency waiver issued during Hurricane Dorian, the IRS allowed dyed diesel to be used on highways but required the operator or fuel seller to pay the applicable highway-use tax. That tax was listed at 24.4 cents per gallon in the 2019 guidance.

IFTA reporting clarification

Carmen Martorana, executive director of the International Fuel Tax Association, said the federal excise tax associated with the temporary use of dyed diesel is not reported on the International Fuel Tax Agreement return.

The relief applies only to federal penalties and enforcement. It does not change state fuel-tax laws, state penalties or other requirements imposed by individual jurisdictions.

The IRS also said it will not conduct federal roadside inspections for dyed diesel use during the relief period. The agency indicated that it may issue additional guidance regarding the treatment and payment of the underlying taxes after the temporary policy expires.