IRS Weighs In on Red-Dyed Diesel Tax Relief
The Internal Revenue Service is temporarily suspending federal penalties tied to the sale or use of red-dyed diesel fuel on public highways nationwide. The relief applies retroactively from Oct. 1 through Dec. 31, 2026, but the federal excise tax is not reported through the International Fuel Tax Agreement (IFTA) return, according to IFTA Executive Director Carmen Martorana.
Federal Penalties Deferred
President Trump signed the Emergency Tax Relief on Diesel Fuel executive order on Oct. 5. The order directed the Treasury Department to determine whether certain federal diesel-tax payments could be deferred and instructed the IRS to provide relief from penalties involving dyed fuel.
The IRS later announced that it would not impose federal penalties when red-dyed diesel is sold for highway use or used on highways during the relief period. The agency said the policy applies nationwide for federal tax purposes and covers activity from Oct. 1 through Dec. 31, 2026.
The relief includes penalties related to the sale or use of dyed diesel on highways, failure to make semimonthly federal tax deposits, and inadequate recordkeeping. Collection and enforcement activities involving the covered transactions also will be suspended during the period.
IFTA Reporting Remains Unchanged
Although enforcement of the federal dyed-diesel restrictions is suspended, the federal excise tax is not reported on an IFTA return, Martorana told Land Line. The temporary federal policy therefore does not create a separate IFTA reporting requirement for the fuel.
The federal highway diesel tax is generally not applied to red-dyed diesel when it is used in qualifying off-road equipment, such as construction machinery. On-highway use ordinarily results in federal tax obligations and potential penalties.
State Taxes Not Included
The IRS clarified that its penalty relief applies only to federal tax requirements. It does not suspend state fuel taxes, state penalties, or other state-level enforcement policies.
Trucking companies and fuel suppliers may therefore face different requirements depending on the state in which the fuel is sold or used. The federal action also does not permanently change the rules governing dyed diesel; it temporarily defers specified federal tax enforcement during the covered period.
Industry Concerns
Patrick De Haan, GasBuddy’s petroleum analyst, said the policy could increase demand for red-dyed diesel because the fuel is typically exempt from federal highway taxes when used for eligible nonroad purposes. Red dye is used to help enforcement personnel identify fuel that is not intended for ordinary highway use.
The federal relief remains limited to the dates and penalties identified by the IRS. The agency’s announcement does not alter state tax requirements or convert red-dyed diesel into a permanently tax-exempt fuel for highway operations.
