IRS Weighs Red-Dyed Diesel Tax Relief for Land Line

The Internal Revenue Service has temporarily suspended federal penalties for selling or using red-dyed diesel fuel on public highways nationwide, but the underlying federal excise tax remains due and should not be reported on an International Fuel Tax Agreement return, according to IFTA Executive Director Carmen Martorana.

Penalty relief applies nationwide

The IRS announced that it will not impose federal penalties when dyed diesel is sold for highway use or used in diesel-powered vehicles on public roads during the relief period, which runs from Oct. 1 through Dec. 31, 2026. The relief was issued in response to an executive order directing the Treasury Department to suspend certain enforcement actions.

The temporary policy applies to both sellers of dyed diesel and users of the fuel on highways. The IRS said it also covers penalties associated with failing to make semimonthly tax deposits or maintain required records. Collection and enforcement activities related to the covered penalties will be suspended during the relief period.

Federal tax remains separate from IFTA reporting

Although federal penalties are being suspended, the federal excise tax on highway diesel has not been eliminated or deferred for purposes of fuel-tax reporting. The federal highway-use tax is 24.4 cents per gallon.

Martorana said the federal excise tax should not be included on an IFTA return. IFTA reporting generally concerns fuel taxes administered by participating jurisdictions, while the federal excise tax is handled separately by the IRS.

For example, the federal portion of the tax on a 250-gallon fill would be approximately $61 before any applicable state taxes.

State taxes are not affected

The IRS clarification applies only to federal tax penalties. It does not suspend state fuel taxes, state penalties or other state-level enforcement requirements. Motor carriers and fuel sellers may therefore face different rules depending on the jurisdiction involved.

Dyed diesel is normally intended for off-road use, including construction equipment and agricultural machinery, and is exempt from the federal highway fuel tax when used for those purposes. Using the fuel in an on-highway vehicle ordinarily triggers federal tax obligations and penalties.

The temporary relief is intended to address fuel-supply concerns. A similar federal waiver was issued during Hurricane Dorian in 2019, although that relief required the applicable highway fuel tax to be paid.

Relief is temporary

The IRS guidance does not provide permanent forgiveness of the tax. Once the relief period ends, normal federal requirements and enforcement procedures are expected to resume unless additional action is taken.

Industry representatives have also raised concerns about removing dyed fuel from tanks after the temporary period because the dye can remain in a vehicle’s fuel system and potentially create compliance issues once enforcement resumes.