The IRS announced on October 14, 2026, that it would waive dyed diesel penalties for highway use nationwide. The relief applies retroactively from October 1, 2026, through December 31, 2026, under announcement IR-2026-122. The agency’s notice covers fuel sold for highway use or used in diesel-powered vehicles on highways.
President Trump signed a diesel-fuel directive on October 5, 2026. The agency’s action followed that directive, but suspending penalties does not eliminate the underlying federal tax.
The pause applies only to federal penalties. It does not alter state fuel taxes or state penalties for highway use of dyed diesel.
The agency says many states have issued similar excise-tax relief, but not all have done so. Taxpayers should check with their state agencies for current rules.
The federal penalty pause leaves the underlying tax intact
The relief suspends penalties under 26 U.S.C. 6715(a)(1) and 26 U.S.C. 6715(a)(2). Those provisions address dyed fuel sold or held for a known non-exempt use, and fuel knowingly held or used in a taxable way. The usual penalty can reach $1,000 per violation.
The waiver also covers penalties for missing semimonthly tax deposits and for inadequate records during the relief period. Taxpayers do not need to keep records to establish eligibility for this penalty relief.
Sellers and distributors also have no obligation to investigate or document the final use of dyed fuel sold during the covered period. The tax itself remains relevant, however. A retail seller generally owes it; if the fuel was not purchased at retail, the vehicle operator may be liable, including when using fuel from a farm storage tank.
Treasury must determine how postponed payments will work
The federal excise taxes under IRC §§ 4041(a)(1)(A) and 4041(b)(1)(B) remain in force. The rate is $0.244 per gallon on certain diesel fuels.
President Trump signed Executive Order 14435, titled “Emergency Tax Relief on Diesel Fuel,” on October 5, 2026. It cites restricted global diesel supply and rising prices, saying “American farmers, truckers, and workers” have been particularly hard hit.
The order told the Treasury secretary to decide within 5 days whether 26 U.S.C. 7508A authorizes postponing tax deadlines. That provision allows Treasury to postpone deadlines for taxpayers affected by federally declared disasters, significant fires, or terroristic or military action.
The directive calls for postponing, without penalties, interest, additional amounts or additions to tax, payments for taxes incurred from October 5 through December 31, 2026. It also tells Treasury to explore ways, including legislation, to eliminate the obligation to pay deferred amounts. That is not the same as canceling the tax.
The agency anticipates further guidance on postponement and on how the relief applies to Form 720, the Quarterly Federal Excise Tax Return, and other relevant forms. Treasury’s instructions must establish the conditions and legal basis, identify covered taxpayers and locations, and set the date postponed taxes must be paid.
Red dye marks fuel intended for off-road use
Dyed diesel is generally untaxed when it is meant for exempt uses such as farming. It becomes taxable when sold for highway use or used to power a highway vehicle.
The red dye identifies fuel intended for off-road uses, including agricultural work, construction and heating. The order also directs the Secretary of Transportation, through the Federal Motor Carrier Safety Administration administrator, to coordinate with state governments, industry leaders and labor organizations. It calls for continued compliance enforcement.
The directive requires officials to assess and publicly announce how the agency should allocate resources for vehicle fuel tank inspections and fuel sampling during the relief period. It also refers to consultation with the “Secretary of War.”
State fuel taxes are not covered by the federal relief
The agency says the federal pause “has no effect on state fuel taxes and penalties that a state may impose on the use of dyed diesel fuel on the highway.” Many, but not all, states have granted similar relief.
Holland & Knight raised a practical question about whether the federal change will have much effect given the “lack of infrastructure for the retail sale of dyed diesel.” The firm’s observation highlights a limit on how easily buyers may obtain this fuel for highway use.
EY’s Tax Alert 2026-2229, dated October 19, 2026, warned companies not to treat delayed payment as tax forgiveness:
“a deferral of the payment obligation should not be construed as a repeal or forgiveness of the underlying tax liability”
The alert advised companies to “continue to track and account for these liabilities appropriately, so that they can comply with any future payment, reporting or reconciliation requirements.” EY lists Lori Haniford, Wes Ratcliff and Frank Aleman of its National Excise Tax group as contacts for excise-tax questions.
Taxpayers who believe they qualify but receive a penalty notice should follow the instructions on the notice or contact the agency. The announcement carries an October 14, 2026, release date, while the webpage lists October 13.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional or CPA about your specific situation.
