The Internal Revenue Service has issued additional guidance on recordkeeping requirements for sellers and users of dyed diesel fuel for on-road operations. The notice states “the IRS will not challenge temporary failures to meet return-filing, reporting or recordkeeping requirements solely attributable to liability under section 4041(a) arising from taxable uses of dyed diesel occurring on or after Oct. 1, 2026, and before Jan. 1, 2027. This relief includes filing Form 720 solely to report that liability, reporting that liability on an otherwise required Form 720, and creating or maintaining records solely to substantiate that liability. The IRS will not assert civil penalties or additions to tax solely for failures covered by this announcement.”

In short, taxpayers will not have to file Form 720 with the IRS to report tax liability for using dyed diesel fuel in on-road applications or to keep records to verify that tax liability.

This notice does not forgive the federal tax liability for using dyed diesel fuel on the highway during the relief period. Nor does it affect state law tax liability or restrictions on using dyed diesel fuel on the highway.

Previously, the IRS stated it will not impose a penalty when dyed diesel fuel is sold for use or used on highways nationwide. The relief is retroactive to October 1, 2026, and will remain in effect until December 31, 2026. Relief is available to any person who sells dyed diesel fuel or uses dyed diesel fuel for highway use.

Further, NEFI members are reminded that this relief only applies for federal tax purposes. It has no effect on state fuel taxes and penalties that a state may impose on the use of dyed diesel fuel on the highway. Many, but not all, states have provided similar state excise tax-related relief. Taxpayers are encouraged to refer to their applicable state agencies for the latest guidance on state-level relief. Here is a list of states that have provided some form of emergency relief.

In addition, the IRS relief does not include a fuel waiver from the Environmental Protection Agency. Prior IRS dyed-fuel waivers were limited to fuel meeting the 15-ppm sulfur standard, and dyed product sold for highway use should continue to meet the ultra-low sulfur diesel (ULSD) standard.

For practical purposes, there is also the question of whether using heating oil as a fuel for an on-road engine might damage the engine. Heating oil is chemically very similar to dyed diesel fuel but is made to a different specification (ASTM D396). Additionally, heating oil now commonly contains biodiesel blends of at least 5% (ASTM D396 now allows up to a 50% blend of biodiesel). This could cause issues for some highway engines. Dealers should be careful not to certify or guarantee to customers that heating oil is an appropriate fuel for on-road use.

Finally, NEFI advises that dealers should continue to collect the tax for any on-road use and keep records of all such sales, including deliveries to fleet or farm tanks.

The IRS has also posted on its website Frequently Asked Questions on the temporary relief granted for used of dyed diesel fuel on the highway.

NEFI will continue to monitor this issue and provide updates to our members as needed. If you have any questions, contact NEFI Regulatory Counsel Rick Schweitzer at rpschweitzer@rpslegal.com.