Dyed Diesel on the Highway (October 1–December 31, 2026): IRS Waives Form 720 Reporting and Recordkeeping (IR-2026-125) — What Farms, Contractors, Truckers and Fuel Sellers Should Do Now

Bottom line in one breath

On October 21, 2026, the IRS announced in IR-2026-125 that it will not challenge failures to file, report or keep records that are solely attributable to federal excise tax under IRC §4041(a) on taxable uses of dyed diesel occurring on or after October 1, 2026 and before January 1, 2027. That includes filing Form 720 just to report that liability, reporting it on a Form 720 you otherwise file, and creating or keeping records just to support it — and the IRS says it will not require catch-up filing or record reconstruction after December 31, 2026. Together with the October 14, 2026 penalty relief in IR-2026-122, this answers the main open question left by Executive Order 14435. Two things do not change: Form 720 filers must still report their other excise taxes (the Q3 2026 Form 720 is due Monday, November 2, 2026), and state fuel-tax rules — such as North Carolina's Session Law 2026-62 and Form GAS-1259 — still apply.

News background

Dyed diesel is normally untaxed because it is sold for exempt, off-highway uses such as farming or construction equipment. If it is sold for highway use or used to power a highway vehicle, federal tax under §4041 generally applies (24.4 cents per gallon for diesel), and §6715 penalties can apply — generally the greater of $1,000 or $10 per gallon. The person liable is generally the retail seller or, for fuel from bulk storage (for example, a farm tank), the vehicle operator.

On October 5, 2026, Executive Order 14435, "Emergency Tax Relief on Diesel Fuel," directed Treasury to consider deferring certain §4041 diesel taxes and to announce penalty relief. YCL covered the order on October 9, 2026, before any IRS guidance existed.

October 14, 2026 — IR-2026-122: the IRS said it will not impose penalties when dyed diesel is sold for use or used on highways nationwide from October 1 through December 31, 2026, including penalties for missed semimonthly deposits and inadequate records; federal on-road dyed-fuel inspections are suspended; sellers need not investigate or document end use. It said further guidance on §7508A postponement and on Form 720 would follow.

October 21, 2026 — IR-2026-125: that Form 720 guidance arrived as reporting and recordkeeping relief. The IRS is also considering a grace period for residual red dye left in fuel tanks after the relief period ends. Sources: IRS IR-2026-122 and IR-2026-125; NCDOR notice on Session Law 2026-62 (October 12, 2026).

Old rules vs. new rules

Penalty for dyed diesel on the highway: Old — §6715 penalty, generally the greater of $1,000 or $10 per gallon. Now (October 1–December 31, 2026) — the IRS will not impose excise-tax penalties for dyed diesel sold for or used in highway vehicles (IR-2026-122).

Reporting the §4041(a) liability on Form 720: Old — report quarterly on Form 720 and make semimonthly deposits. Now — the IRS will not challenge failures to file Form 720 solely for that liability or to report it on an otherwise required Form 720, and will not assert civil penalties or additions to tax for those failures (IR-2026-125).

Records: Old — keep records that substantiate the use and the tax. Now — no records need to be created or kept solely to substantiate that dyed-diesel liability, and none must be reconstructed after December 31, 2026.

Other excise taxes: Unchanged — anyone who files Form 720 for other liabilities must still file, report and keep records for them.

Fuel tax credits and refunds: Unchanged — records required for a claim for exemption, credit or refund (for example, Form 4136 or Form 8849) are not covered by the relief.

After December 31, 2026: Normal rules return. The IRS is considering a residual-dye grace period; further guidance is expected.

State rules and EPA: Unchanged by the IRS announcements. In North Carolina, S.L. 2026-62 sets 0¢ motor fuel excise tax from October 10 through November 30, 2026, waives state penalties for highway use of dyed diesel for farming or agricultural purposes from October 9 through December 31, 2026, and exempts dyed diesel used in licensed highway vehicles by NCDOR exemption-certificate holders (qualifying or conditional farmers, commercial loggers, commercial fishermen, wildlife managers) from October 1 through December 31, 2026 — but those users must still file Form GAS-1259. NC sales and use tax on dyed diesel and the inspection tax are not suspended.

Are you affected? Self-check list

If you farm, ranch or log and fill a licensed truck from your own dyed-diesel tank: federal penalties and Form 720 reporting for that use are relieved through December 31, 2026, but check your state rules (in North Carolina, whether you hold an NCDOR exemption certificate and must file GAS-1259).

If you are a fuel retailer or distributor selling dyed diesel that may go into highway vehicles: you need not investigate end use during the relief period, but keep filing Form 720 for your other excise taxes and handle state returns and sales tax as usual.

If you run a construction, landscaping or equipment-rental company with a shared dyed-diesel tank: federal relief covers the highway use; still keep your normal fuel records for off-highway use if you claim any fuel tax credit or refund.

If you operate a trucking fleet that crosses state lines: federal relief is nationwide, but other states' dyed-fuel penalties may still apply; ordinary clear, tax-paid diesel is not affected by these announcements.

If you already file Form 720 every quarter: file Q3 2026 (July–September) normally by November 2, 2026; for Q4 2026, separate any dyed-diesel §4041(a) highway-use liability from the taxes you still must report.

Simplified example

Simplified illustration only, not a prediction of any agency position. State amounts and other taxes are ignored.

A North Carolina grain farm (illustrative) puts 1,500 gallons of dyed diesel from its farm tank into a licensed grain truck between October 15 and December 15, 2026, hauling to the elevator on public roads.

Under the old federal rules: §4041 tax of about 1,500 × $0.244 = $366, reported on Form 720, plus possible §6715 exposure of the greater of $1,000 or 1,500 × $10 = $15,000.

Under IR-2026-122 and IR-2026-125: no federal penalty for the highway use; no Form 720 filing, reporting or records required solely for that §4041(a) liability, and no reconstruction after December 31, 2026.

North Carolina side: if the farm holds an NCDOR qualifying-farmer exemption certificate, state motor fuel excise tax does not apply to that use from October 1 through December 31, 2026, but the farm must still file GAS-1259.

After January 1, 2027: the same truck still has red dye in its tank. Until the IRS issues the residual-dye guidance, plan to run the tank down or flush it before normal enforcement resumes.

Action plan and timeline

Now (October 22, 2026): Identify which vehicles, tanks and customers involve dyed diesel on the highway. Keep the records you need for other taxes and for any fuel tax credit or refund claims.

Monday, November 2, 2026: Q3 2026 Form 720 is due (October 31 falls on a Saturday). Q3 is before the relief period; file and pay as usual.

By Monday, November 30, 2026: North Carolina's 0¢ motor fuel excise tax period ends; NC motor fuel returns and miles must still be reported during the suspension.

Thursday, December 31, 2026: Federal penalty, reporting and recordkeeping relief and NC farming-use relief end. Plan tank flushing and watch for the IRS residual-dye grace period.

Monday, February 1, 2027: Q4 2026 Form 720 is due (January 31 falls on a Sunday). Report your other excise taxes; follow any additional IRS instructions on §4041(a) dyed-diesel amounts.

2027 filing season: Carry fuel costs, fuel tax credits and any excise amounts correctly into Schedule F, Schedule C, Form 1120-S or Form 1065 workpapers.

How YCL can help

Form 720 review: separate dyed-diesel §4041(a) highway-use amounts covered by the relief from the excise taxes you still must report for Q3 and Q4 2026.

Fuel records and credits: a simple ledger template so off-highway fuel use and Form 4136 or Form 8849 claims remain supported.

Multistate fuel compliance: a federal-plus-state comparison for each state you operate in, including North Carolina GAS-1259 filings and sales and use tax questions.

Guidance tracking: a short client memo when the IRS releases its residual-dye grace period or §7508A guidance.

Year-end planning: connect fuel costs and excise items with your farm, S Corp, partnership or Schedule C returns.

YCL Accounting & Consulting is a multistate CPA firm serving clients nationwide, in English and Chinese.

FAQ

Q: Do I need to file Form 720 for dyed diesel used on the highway in October–December 2026?

A: Not solely for that liability. IR-2026-125 says the IRS will not challenge a failure to file Form 720 solely to report §4041(a) liability from taxable dyed-diesel uses from October 1, 2026 through December 31, 2026, or to report it on an otherwise required Form 720. Form 720 filers must still report their other excise taxes.

Q: Does the federal relief cover state fuel taxes and penalties?

A: No. The IRS says the relief applies only for federal tax purposes. In North Carolina, S.L. 2026-62 provides separate, narrower relief, and exempt users must still file Form GAS-1259.

Q: What happens to red dye left in my tank after December 31, 2026?

A: The IRS says it is aware of the concern and is considering a grace period or other mitigation, with further guidance to follow. Until then, plan to use up or flush dyed fuel in highway vehicles before the relief period ends.

Q: Do I still need fuel records for fuel tax credits?

A: Yes. IR-2026-125 does not affect recordkeeping or reporting required for another tax or for a claim for exemption, credit or refund.

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Disclaimer

This article is general tax information only and is not tax, legal or fuel-compliance advice for any person or business. It does not promise any tax result or agency position. It is based on IRS news releases IR-2026-122 (October 14, 2026) and IR-2026-125 (October 21, 2026), Executive Order 14435, and the NCDOR notice on Session Law 2026-62 (October 12, 2026). IRS and state guidance may be updated, and EPA fuel rules are separate. Consult a licensed tax professional about your situation.