The IRS says it will not impose penalties when dyed diesel is sold for use, or used, on highways nationwide, retroactive to October 1 and running through December 31, 2026. A second release on October 21 also waives related reporting and recordkeeping. Both follow a presidential executive order on diesel tax relief.
The short answer
Under IR-2026-122 and IR-2026-125, the IRS will not assess penalties, require Form 720 reporting, or require substantiating records for highway use of dyed diesel from October 1 through December 31, 2026. The relief is federal only, and the IRS says more guidance is coming on how the tax itself is treated.
What happened
On October 14, the IRS announced in IR-2026-122 that it will not impose a penalty on any person who sells dyed diesel for highway use or uses it on a highway, responding to the President’s October 5, 2026 executive order, Emergency Tax Relief on Diesel Fuel. The relief runs retroactively from October 1 until December 31, 2026. The IRS said taxpayers “need not maintain records necessary to substantiate their eligibility,” and that it is suspending routine enforcement of on-road dyed fuel use.
On October 21, IR-2026-125 added temporary relief from reporting and recordkeeping for taxes under section 4041(a) for taxable uses between October 1, 2026 and January 1, 2027. Covered items include filing Form 720 solely to report that liability and keeping records solely to substantiate it. The IRS said no later reconstruction is required.
| Item | What the IRS said |
|---|---|
| Penalty relief (IR-2026-122) | Oct. 1 through Dec. 31, 2026, dyed diesel sold or used on highways |
| Reporting and records (IR-2026-125) | Section 4041(a) liability only; no later reconstruction |
| Other Form 720 liabilities | Must still file, report and keep records |
| State taxes | Not covered; relief is federal only |
| Still pending | Further guidance on tax postponement, Form 720 and residual red dye |
Why it matters
The IRS says it anticipates further guidance on postponing the tax itself and on how the relief interacts with Form 720, and that it is considering a grace period for residual red dye in vehicle tanks. Until that guidance arrives, the release does not tell you how much, if anything, you ultimately owe or save. The IRS also noted that many, but not all, states have comparable relief.
What this means for small business owners
- Do not book savings yet. Penalty relief is not a confirmed tax reduction. Keep fuel expense at what you actually paid until the IRS finishes its guidance.
- Keep keeping records anyway. The relief covers 4041(a) liability, not every fuel-related claim, credit or refund. Other Form 720 items and any exemption claim still need support.
- Tag diesel purchases. Separate on-road dyed diesel from off-road or farm use in your chart of accounts. If the rules shift, you can answer a question in minutes instead of reconstructing months.
- Check your state. Federal relief does not touch state fuel taxes. Confirm what your state does before assuming anything.
- Calendar December 31. The relief ends then unless extended.
Frequently asked questions
Who does the IRS dyed diesel relief cover?
Per IR-2026-122, any person that sells dyed diesel for highway use or uses it on highways during the relief period.
When does the relief start and end?
It is retroactive to October 1, 2026 and remains in effect until December 31, 2026.
Do I still need to file Form 720?
Not solely for section 4041(a) liability during the period, per IR-2026-125. If you file Form 720 for other liabilities, you must keep doing so.
Does this cover state fuel taxes?
No. The IRS says the relief applies to federal tax purposes only.
Is the tax itself waived?
The releases address penalties, reporting and records. The IRS says further guidance on the tax is coming.
Taxpayers “need not maintain records necessary to substantiate their eligibility for relief.” IRS, IR-2026-122
The bottom line
This is breathing room, not a refund. Keep clean fuel records, wait for the follow-up guidance, and treat December 31 as the deadline that matters.
Last updated: October 21, 2026. Sources: IR-2026-122, IR-2026-125. General information, not tax advice.
