Key insights
- The IRS’s new refund process allows taxpayers to reclaim previously paid federal excise tax on diesel or kerosene when the fuel is later treated as exempt dyed fuel, but only if they originally paid the tax.
- Because the refund program has no dedicated funding, businesses that didn’t directly pay the excise tax aren’t eligible for refunds unless Congress changes the law.
- The IRS won’t accept or review any refund claims until it releases formal procedures in early 2026, so taxpayers should hold off on filing.
- Affected taxpayers should begin reviewing their fuel tax records now to determine whether they paid tax on fuel later treated as dyed fuel so they are prepared to submit claims once the IRS issues instructions.
Can you capture the dyed fuels refund?
The IRS provided guidance (Announcement 2026-1) for taxpayers seeking refunds of federal excise tax previously paid on diesel or kerosene later treated as exempt dyed fuel. The new rules, enacted under the One Big Beautiful Bill Act, allow certain businesses to recover taxes they initially paid. But eligibility is limited, and the refund process is not yet open.
Explore what affected taxpayers need to know now, what steps to take next, and how to prepare for the IRS’s upcoming procedural instructions.
Dyed fuels refund background
The dyed fuels refund was added to the Internal Revenue Code to allow a payment — without interest — equal to the amount of federal fuel excise tax previously paid on fuel later qualifying for exemption under the dyed fuels exemption.
To qualify for a refund, a taxpayer must show:
- The dyed fuel was removed from a terminal
- Federal fuel excise tax was previously paid on the fuel and hasn’t already been refunded or credited
- The fuel is exempt under the dyed fuels exemption
These rules apply to dyed fuel removed on or after December 31, 2025.
Who can receive a dyed fuels refund?
The IRS highlights a key restriction: The dyed fuels refund doesn’t have its own refund appropriation. Refunds must be paid from the general refund account, which is only available to the person who originally paid the tax.
This means:
- Only the taxpayer who actually paid the federal fuel excise tax may claim a refund
- Distributors, retailers, or downstream entities who didn’t directly pay the tax won’t be eligible unless Congress amends the statute
Dyed fuels refund implementation timeline: What happens next
The IRS plans to publish detailed procedural guidance in early 2026, including:
- Filing instructions
- Required documentation
- Claim submission timelines
Do not file any dyed fuels refund claims yet. The IRS won’t accept or review claims submitted before issuing the official process.
What affected taxpayers should do now
Even though claims can’t yet be filed, taxpayers can begin preparing.
1. Review your fuel tax payment history tax payment history
Confirm whether your organization was the taxpayer who remitted the federal fuel excise tax on fuel later treated as dyed fuel.
2. Organize documentation
You may eventually need:
- Terminal removal records
- Proof of tax payment
- Documentation showing the fuel became dyed and exempt
3. Stay current on IRS announcements
Formal guidance is expected in 2026 to outline the full process. Businesses preparing early may be better positioned to submit timely, accurate refund requests.
How CLA can help with dyed fuels refunds
CLA can help analyze your fuel tax payment history, determine whether you qualify as the original taxpayer eligible for refunds, and prepare the documentation you will need once the IRS’s procedural guidance is released.
Our team closely monitors IRS activity and will keep you informed as new information becomes available. We can review your tax payment history, determine whether you qualify as the original taxpayer eligible for refunds, and prepare the necessary documentation once the IRS releases its procedural guidance.
Contact us
Can you capture the dyed fuels refund? Complete the form below to connect with CLA.