In response to the supply chain disruptions created by the Colonial Pipeline shutdown, the IRS is temporarily suspending the penalty for selling or using dyed diesel fuel for highway use in Alabama, Delaware, Georgia, Florida, Louisiana, Maryland, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, and the District of Columbia.
Normally, dyed diesel fuel is not subject to the 24.4¢ per gallon tax that is normally applied to diesel fuel for highway use because it's only sold for tax-exempt uses, such as for farming, home heating, and local government purposes. (The fuel is dyed – often red – to distinguish it from taxable fuel.)
The penalty is typically imposed if:
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- Any dyed fuel is sold or held for sale for a use the person knows or has reason to know isn't a nontaxable use of the fuel;
- Any dyed fuel is held for use or used for a use other than a nontaxable use and the person knew, or had reason to know, that the fuel was dyed;
- The strength or composition of any dye in dyed fuel is willfully altered, or there is an attempt to alter it; or
- Altered fuel is knowingly sold or held for sale for any use that isn't a nontaxable use of the fuel.
The penalty is $1,000 or $10 per gallon of the dyed diesel fuel involved, whichever is higher. For multiple violations, the $1,000 portion of the penalty increases depending on the number of violations.
The penalty relief is retroactive to May 7, 2021, and will remain in effect through May 21, 2021. It's available to any person that sells or uses dyed diesel fuel for highway use. In the case of the operator of a vehicle in which the dyed diesel fuel is used, the penalty relief is available only if the operator or the person selling the fuel pays the 24.4 cents per gallon tax that is normally applied to diesel fuel for highway use. The IRS also won't impose penalties for the failure to make semimonthly deposits of this tax.
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