IRS Suspends Penalties for Highway Use of Dyed Diesel Fuel

The IRS on October 14, 2026, announced temporary relief from federal tax penalties associated with the highway use of dyed diesel fuel.

The announcement implements President Donald Trump's October 5, 2026, Executive Order (EO) 14435, "Emergency Tax Relief on Diesel Fuel," and provides that the IRS will not impose a penalty when dyed diesel fuel is sold for use or used on highways anywhere in the U.S. The relief is retroactive to October 1, 2026, and will remain in effect until December 31, 2026.

This Holland & Knight alert summarizes the background and scope of the IRS relief and open questions that forthcoming guidance is expected to address.

Background

Section 4041(a)(1)(A) and Section 4041(b)(1)(B) of the Internal Revenue Code (the Code) imposes a federal excise tax on dyed diesel fuel when it is sold for highway use or used to power a vehicle on the highway. Generally, a taxpayer subject to such excise taxes must make semimonthly deposits. Failure to make deposits may result in penalties.

Section 6715(a)(1) and (a)(2) of the Code imposes a penalty of up to $1,000 for any dyed fuel that is 1) sold or held for sale by any person for any use that such person knows or has reason to know is not a nontaxable use of such fuel or 2) held for use or used by any person for a use other than a nontaxable use and such person knew, or had reason to know, that such fuel was dyed.

Key Provisions of the EO

The EO, signed October 5, 2026, directs the U.S. Department of the Treasury Secretary to determine whether relief from the Section 4041 dyed diesel excuse tax is authorized under Section 7508A of the Code. Section 7508A permits the Treasury Department to postpone certain tax-related deadlines for up to one year for taxpayers affected by a federally declared disaster, significant fire or terroristic/military action.

If authorized, the Treasury Department was directed to defer payment of taxes incurred from October 5, 2026, through December 31, 2026. Any deferred amounts do not incur penalties, interest, additional amounts or additions to tax, to the extent authorized by law. The EO also directed the Treasury Department to suspend IRS imposition of penalties imposed under Section 6715 when dyed diesel is sold for use or used on the highway. Finally, the EO required the Treasury Department to issue guidance providing relief from penalties for failure to make semimonthly deposits of any excise taxes owed.

Scope of the IRS Relief

The IRS announcement provides that relief is available to any person who sells dyed diesel fuel for highway use or uses dyed diesel fuel on highways. From October 1 through December 31, 2026:

• No Penalties. The IRS will not impose excise tax penalties on dyed diesel fuel sold for use or used in diesel-powered vehicles on highways nationwide. This includes penalties for failure to make semimonthly deposits of tax.
• Enforcement Suspended. Ordinary procedures for collection and enforcement of the tax under Section 4041(a)(1)-(2) are suspended. Further, no federal inspections of on-road dyed fuel usage will occur.
• No Substantiation Records Required. Taxpayers are not required to maintain records necessary to substantiate their eligibility for relief.
• No End-Use Diligence for Sellers. Sellers and distributors are under no obligation to investigate or document the ultimate end use of dyed fuel.

Future Guidance

Though the announcement addresses penalties, collection and enforcement, it does not itself eliminate the underlying excise tax. The IRS anticipates issuing further guidance under Section 7508A of the Code regarding the postponement of taxes imposed by Sections 4041(a)(1)(A) and 4041(b)(1)(B) and has stated that it will explore avenues to eliminate the obligation to pay any deferred amounts.

Forthcoming IRS guidance is also expected to detail how the relief applies to Form 720 (Quarterly Federal Excise Tax Return) and any other relevant forms. Until that guidance is released, it remains uncertain whether, and on what terms, deferred tax amounts may ultimately be payable.

The Holland & Knight Energy Tax Team is available for questions regarding the guidance. To receive additional analysis from the team, please subscribe to our alerts.

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