Can I legally use dyed diesel on the highway right now?

For federal purposes, the IRS says it won't impose penalties for dyed diesel sold for use or used on highways from Oct. 1 through Dec. 31, 2026. State fuel taxes and penalties aren't covered, so check your state's rules before you drive.

Do I still owe federal excise tax on dyed diesel I burn on the road?

The IRS relief covers penalties, not the tax itself. The IRS says it expects further guidance on postponing the tax and will explore ways to eliminate deferred amounts, but no final answer has been issued.

How long does the IRS dyed diesel penalty relief last?

From Oct. 1, 2026, through Dec. 31, 2026. The executive order itself named Oct. 5 as the start date, and the IRS chose an earlier one.

Does a fuel dealer have to ask customers how they'll use dyed diesel during the relief period?

No. The IRS says sellers and distributors have no obligation to investigate or document the end use of dyed fuel sold during the relief period.

Do I need to keep records of dyed diesel I use on the highway?

The IRS says you don't need records to qualify for the penalty relief. The American Soybean Association still urged farmers to document purchases and use in case deferred taxes come due, according to DTN.

Running Red Diesel on the Highway? The IRS Has Paused Penalties Through Dec. 31, but the Tax Itself Isn't Settled

“All IRS Fuel Compliance Officers will be re-assigned other responsibilities, and no federal inspections of on-road dyed fuel usage will occur” ^[1]. That’s a sentence from an IRS news release on Oct. 14, and if you farm, sell fuel or run diesel trucks, it’s a big one. Through the end of the year, the IRS won’t penalize anyone for putting red-dyed diesel in a highway vehicle ^[1]. What it hasn’t done yet is say whether you’ll owe the tax on that fuel.

What changed

Some background first. Dyed diesel is ordinary diesel dyed red to show it hasn’t been taxed, because it’s meant for an exempt use such as farming ^{[1, 3]}. Run it in a vehicle on the highway, or sell it for that purpose, and the federal excise tax applies ^[1]. DTN puts the federal tax on highway diesel at 24.4 cents per gallon ^[3].

Who owes that tax depends on how the fuel was bought. Generally it’s the retail seller. If the fuel didn’t come from a retail sale, such as diesel kept in a storage tank on a farm, it’s the person operating the vehicle ^[1].

On Oct. 5, the President signed Executive Order 14435, “Emergency Tax Relief on Diesel Fuel,” published in the Federal Register on Oct. 9 ^[2]. It gave the Treasury Secretary five days to decide whether Section 7508A of the tax code, the law that lets Treasury postpone tax deadlines after certain qualifying events, authorizes deferring the diesel taxes incurred from Oct. 5 through Dec. 31, 2026 ^[2]. It also told Treasury to have the IRS announce it won’t impose the dyed fuel penalties for that period ^[2].

The IRS announcement came Oct. 14 ^[1]. During the relief period:

No penalties related to the excise tax on dyed diesel sold for use or used in vehicles on highways nationwide, including penalties for missing semimonthly tax deposits or for inadequate records ^[1].
No enforcement. Ordinary collection and enforcement procedures are suspended, and no federal on-road inspections ^[1].
No paperwork to prove eligibility. Taxpayers don’t need to keep records to substantiate the relief ^[1].
No questions at the pump. Sellers and distributors don’t have to investigate or document how buyers end up using the fuel ^{[1, 5]}.

One detail differs between the two documents. The order names a period beginning Oct. 5 ^[2]. The IRS made its penalty relief retroactive to Oct. 1 and runs it through Dec. 31, 2026 ^[1]. That’s a three-month window ^[5].

Penalty relief isn’t tax relief

Here’s the short version: the penalty is paused, and the tax is still on the books.

The IRS release says it “anticipates that it will issue further guidance” on postponing payment of the two diesel taxes under Section 7508A, and that it “will explore avenues to eliminate the obligation to pay any amounts deferred” ^[1]. That wording follows the order, which asks Treasury to explore ways, “including legislation,” to wipe out deferred amounts ^[2]. Exploring isn’t the same as forgiving. As DTN noted when the order was signed, it doesn’t eliminate the tax and acknowledges deferred taxes may still be owed ^[3].

Even the deferral is conditional. The order directs it only if Treasury determines a qualifying event has occurred and only “to the extent authorized by law” ^[2]. As of this column, that guidance hasn’t been issued, and neither has the promised explanation of how any of this shows up on Form 720, the quarterly federal excise tax return ^{[1, 5]}.

Farm groups noticed. The American Soybean Association, in a statement quoted by DTN, said it “urges the administration to ensure farmers do not have to pay future deferred taxes for fuel use and are held harmless for residual dyed diesel that may remain in fuel tanks following the expiration of this Order on Dec. 31, 2026” ^[3]. The group also told farmers to keep records of dyed diesel bought and used during the relief period in case those taxes come due ^[3].

That puts a small business in an odd spot. The IRS says you don’t need records for the penalty relief ^[1]. A tax bill that arrives later would still be figured on gallons.

Does this apply to you?

Say you run a hypothetical corn and soybean farm with a dyed diesel tank in the yard, and this harvest you’ve been filling the farm’s pickup from it for trips to the elevator. Because that diesel came out of your own tank, not a retail pump, you’d generally be the person liable for the tax as the vehicle’s operator ^[1]. From Oct. 1 through Dec. 31, the IRS won’t penalize that use, and no federal inspector will be dipping your tank ^[1]. Whether you’ll eventually owe tax on those gallons is the open question ^{[1, 2]}.

Now say you own a hypothetical rural fuel dealer that sells dyed diesel at retail. As the retail seller, you’re generally the one liable when it’s sold for highway use ^[1]. During the relief period you don’t have to ask what customers plan to do with it, and the IRS won’t impose penalties for missed semimonthly deposits on that tax ^[1]. Your Form 720 questions are the ones the IRS still owes answers on ^{[1, 5]}.

Last one. A hypothetical excavation contractor runs diesel dump trucks between job sites in two states. The federal penalty is off the table, but the IRS is clear that its relief “has no effect on state fuel taxes and penalties” a state may impose, and that not every state has offered matching relief ^{[1, 4]}. If one of those states hasn’t, red fuel in the tank is still a state problem. The order also tells the Federal Motor Carrier Safety Administration to keep all its compliance enforcement going, so safety inspections continue ^[2].

If you use dyed diesel only off the road for an exempt use like farming, nothing changes: that fuel stays untaxed, as it always has ^{[1, 5]}.

What to do now

Start with your state, because that’s where penalties can still come from ^{[1, 4]}. Then decide how you’ll track road use. A notebook in the truck with dates and gallons would do. You’re not required to keep it for the penalty relief, but if deferred tax comes due you’ll want the numbers ^{[1, 3]}.

If a penalty notice arrives for dyed diesel use during the relief period anyway, the IRS says to follow the notice’s instructions or contact it for help ^[1].

Fuel costs have been showing up in this column lately. In September I wrote about the FTC’s proposed $100 million settlement over FleetCor fuel card fees, which is about what gets added to a fill-up, not the tax on it.

What I’m keeping an eye on

The IRS’s Section 7508A guidance. It should say whether the tax on dyed diesel used on the road from Oct. 5 through Dec. 31 is postponed, and until when ^{[1, 2]}. The order requires that guidance to name “the date by which postponed taxes must be paid” ^[2].

Form 720 instructions. Sellers need to know how to report this quarter’s highway sales of dyed diesel, and the IRS says that guidance is coming ^{[1, 5]}.

— Sally