Excise tax deferral and penalty relief intended to ease diesel fuel pricing

Under Executive Order 14435, “Emergency Tax Relief on Diesel Fuel,” signed by President Trump on October 5, 2026, the IRS has announced temporary excise tax deferral and penalty relief for dyed diesel fuel sold for highway use or used on highways from Oct. 1 through Dec. 31, 2026.

The initial IRS announcement, IR-2026-122, addresses penalties and anticipated payment deferral. The subsequent announcement, IR-2026-125, provides additional return-filing, reporting and recordkeeping relief. The IRS also released frequently asked questions clarifying seller liability, covered fuels and compliance obligations.

Background: Dyed diesel excise tax

Diesel fuel generally is subject to federal excise tax under section 4081 when removed from a terminal. The tax is ordinarily reflected in the price of clear diesel fuel at a rate of $0.244 per gallon. Properly dyed diesel fuel generally is exempt because it is intended for qualifying nontaxable uses, such as farming and off-highway business activities. When dyed diesel is sold for highway use or used to power a highway vehicle, a backup tax under section 4041 generally applies at the same rate, and misuse of dyed diesel fuel for on-road highway use may trigger penalties.

Deferral of federal excise tax obligations for dyed diesel fuel used on highway

The IRS announcements provide temporary administrative relief from the federal excise tax imposed on dyed diesel sold for highway use or used on highways from Oct. 1 through Dec. 31, 2026. The announcements suspend ordinary collection and enforcement procedures and waive related excise tax penalties, including penalties for failure to make semimonthly deposits.

The IRS relief applies to persons who sell dyed diesel fuel for highway use or who use it on highways during the relief period. The IRS announced it will not impose penalties related to covered sales or use, including penalties for failure to make semimonthly deposits or maintain adequate records. The IRS also will suspend ordinary collection and enforcement procedures, including federal inspections of on-road dyed fuel use, and relieve sellers and distributors of any obligation to investigate or document the fuel’s ultimate use during the relief period.

The FAQ further clarifies that, for the limited purposes of this relief, a seller of dyed diesel during the relief period will be presumed not to know or have reason to know that the fuel is used in a diesel-powered highway vehicle and, under this presumption, will not become liable if an end-user ultimately uses the fuel on-road.

The relief also applies to dyed biodiesel mixtures. It does not apply to federal taxes on clear diesel or dyed kerosene, and it creates no new obligations for distributors, retailers, purchasers or end users. Requirements for other federal taxes remain in effect

Additional filing, reporting and recordkeeping relief

The IRS announced that it will not challenge temporary failures to satisfy return-filing, reporting or recordkeeping requirements solely attributable to backup-tax liabilities arising from taxable uses of dyed diesel during the relief period. The relief exempts taxpayers from:

• Filing Form 720 solely to report those liabilities
• Reporting those liabilities on an otherwise required Form 720
• Creating or maintaining records solely to substantiate those liabilities

The IRS stated it will not assert civil penalties or additions to tax solely for failures covered by the announcement.

This relief applies even if the applicable filing or reporting deadline falls after Dec. 31, 2026. Notably, the IRS announced it will not require subsequent filing, reporting or reconstruction of records for covered liabilities after the date of the end of the deferral of tax. The FAQ confirms that this treatment applies to the fourth-quarter Form 720, including taxpayers who ordinarily file the form and those who otherwise would have no filing obligation. Covered sales will not have to be reported later.

The FAQ also confirms that taxpayers need not maintain documentation of dyed diesel distribution, sales or purchases solely to substantiate covered backup-tax liabilities. However, this relief does not extend to records required for unrelated purposes or taxable uses after the relief period. Taxpayers with other Form 720 liabilities must continue to file, report and maintain records for those liabilities. Requirements independently applicable to another tax or to a claim for exemption, credit or refund also remain in effect.