IRS Waives Penalties for Red-Dyed Diesel on Highways Through Dec. 31
Contractors who run red-dyed diesel in on-road trucks have federal penalty relief through the end of the year. According to the Internal Revenue Service, it will not impose a penalty when dyed diesel is sold for use or used on highways nationwide. The relief is retroactive to Oct. 1, 2026, and stays in effect until Dec. 31, 2026.
What the IRS Announced
The IRS issued the notice (IR-2026-122) on Oct. 14, 2026, in response to the President’s Oct. 5, 2026, executive order, Emergency Tax Relief on Diesel Fuel. Relief is available to any person who sells dyed diesel for highway use or uses it on the highway.
Dyed diesel is normally untaxed because it is destined for an exempt use, such as farming. It becomes taxable if it is sold for highway use or burned in a vehicle on the highway. Generally, the retail seller is liable for the tax, or the vehicle operator when the fuel was not bought at retail, for example fuel held in a private storage tank.
What Changes During the Relief Period
The IRS says ordinary collection and enforcement procedures are suspended. Its Fuel Compliance Officers are being reassigned to other work, and no federal inspections of on-road dyed fuel use will occur. Taxpayers need not keep the records that would normally substantiate eligibility for relief.
The relief covers penalties for failing to make semimonthly tax deposits or to maintain adequate records. Sellers and distributors have no obligation to investigate or document the end use of dyed fuel sold during the period. Taxpayers who believe they qualify but receive a penalty notice should follow the instructions in the notice or contact the IRS.
What Is Still Open
The IRS expects to issue further guidance on postponing payment of certain taxes under 26 U.S.C. 4041, and says it will explore ways to eliminate the obligation to pay any amounts deferred. Forthcoming guidance will detail how the relief applies to Form 720, the Quarterly Federal Excise Tax Return, and other relevant forms.
The relief applies only for federal tax purposes. It does not change state fuel taxes or penalties. The IRS notes that many, but not all, states have offered similar state relief, and taxpayers should check with their state agency.
Regulatory status: An IRS enforcement relief notice tied to an executive order, in effect Oct. 1 to Dec. 31, 2026. It is not a permanent change to the tax code.
What It Means for Subcontractors
- Fleet and equipment managers: If crews fuel on-road trucks from the same dyed tank as excavators and generators, the federal exposure is paused through Dec. 31. Confirm with your tax adviser before changing fuel practices, since the relief is temporary.
- Contractors working across state lines: Federal relief does not override state rules. Check each state where your trucks run before putting dyed fuel in a highway vehicle, because some states have not offered relief.
- Anyone who buys or sells fuel: Sellers are not required to track end use during the period. Keep your own purchase records anyway, so you can show what you used once the relief expires.
- Budget planning: Plan for the relief ending on Dec. 31, 2026. Price winter work with on-road diesel costs in mind unless the relief is extended.
