IRS confirms no federal penalty for on-highway use of red-dye diesel through Dec. 31

The Internal Revenue Service says it will not impose a federal penalty when dyed diesel fuel is sold for use or used on highways nationwide, resolving the tax uncertainty that industry groups warned about after the president's Oct. 5 executive order, according to the Internal Revenue Service on Oct. 14.

The relief is retroactive to Oct. 1 and runs through Dec. 31, 2026, and is available to anyone who sells dyed diesel or uses it for highway use. It covers penalties related to the excise tax, including penalties for failure to make semimonthly deposits of tax or to maintain adequate records.

During the relief period, the IRS said, ordinary collection and enforcement procedures will be suspended, all IRS Fuel Compliance Officers will be reassigned to other responsibilities, and no federal inspections of on-road dyed fuel usage will occur. Taxpayers do not need to maintain records to substantiate their eligibility, and sellers and distributors are under no obligation to investigate or document the end use of dyed fuel sold during the period.

The guidance is the implementing step carriers had been waiting for. When CDLWire covered the industry warnings on Oct. 8, groups including the Energy Marketers of America stressed that a deferral is not forgiveness and that only clear federal guidance would settle whether drivers and truck stops could be taxed later for dyed fuel used now.

Two limits remain. The relief applies only for federal tax purposes — it has no effect on state fuel taxes or penalties a state may impose for on-highway use of dyed fuel, and the IRS noted that many, but not all, states have provided similar state-level relief. The agency also said it anticipates further guidance on the postponement of the underlying tax payments and on how the relief applies to Form 720, the quarterly federal excise tax return.