IRS Eases Form 720 Reporting for Dyed Diesel Used on Highways Through Dec. 31

The IRS on Wednesday, October 21, said it will not penalize businesses that skip the usual excise tax paperwork for dyed diesel fuel used on highways between October 1 and December 31, 2026. The announcement, IR-2026-125, adds reporting and recordkeeping relief to the penalty relief the agency announced a week earlier, and it covers filings that would normally be due on Form 720, the quarterly federal excise tax return.

For contractors, farms, landscapers, haulers and other small operators that run diesel equipment and vehicles, it means one less compliance task during a period of high fuel costs — but it does not touch state fuel taxes or your other excise tax obligations.

What happened

Dyed diesel is normally sold tax-free because it is meant for off-road uses such as farming or construction equipment. It becomes taxable when it is sold for, or used in, a vehicle on a public highway. Generally, the retail seller is liable for that tax; if the fuel was not bought at retail — for example, it came from a farm storage tank — the vehicle operator is liable.

The relief has come in two steps:

• October 14 (IR-2026-122): Following a presidential executive order dated October 5, 2026, the IRS said it will not impose a penalty when dyed diesel is sold for or used on highways nationwide. The relief is retroactive to October 1 and runs through December 31, 2026. The IRS said it suspended its usual collection and enforcement procedures for this fuel, reassigned its fuel compliance officers, and will not conduct federal inspections of on-road dyed fuel use during the period.
• October 21 (IR-2026-125): The IRS added administrative relief for the paperwork. For taxable uses of dyed diesel on or after October 1, 2026, and before January 1, 2027, the IRS will not assert civil penalties or additions to tax solely because a business failed to file a Form 720 just to report the section 4041(a) liability, failed to report that liability on a Form 720 it otherwise had to file, or failed to create or keep records solely to support that liability.

The IRS said the relief applies even when a filing deadline falls after December 31, and that no catch-up filing or record reconstruction is required later. It also said it is considering a grace period for leftover red dye in fuel tanks once the relief period ends, with more guidance to come.

Why it matters for small businesses

Less paperwork on one specific liability. If your only reason to file Form 720 this quarter was dyed diesel used on the road, the IRS says it will not penalize you for not filing for that liability.

Other excise taxes are not covered. If you file Form 720 for anything else, you still must file, report and keep records for those items, the IRS said. The relief also does not change records you need for a fuel tax exemption, credit or refund claim.

State rules are separate. The IRS stressed that its relief has no effect on state fuel taxes and penalties. Many, but not all, states have offered similar relief.

It is temporary. The window closes December 31, 2026. Businesses that switched to dyed fuel should plan for the return to normal rules in January.

What you can do now

1. Check your state’s position. Contact your state revenue or motor fuel agency before relying on the federal relief for state taxes.
2. Keep your normal fuel receipts anyway. Records still support your business expense deductions and any credit or refund claims. Our small business bookkeeping guide covers a simple system.
3. Separate on-road and off-road fuel in your books. Clear categories make the January switch-back easier and help at tax time.
4. Mark January 1, 2027, on your calendar. Watch for the IRS guidance on residual dye in tanks before the period ends.
5. Talk to your tax professional if you file Form 720 for other liabilities or claim fuel tax credits, so nothing is left out.

This brief is for general information only and is not tax or legal advice.