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Ext. PublicationIRS Issues Guidance on Dyed Fuel Tax Refunds: Are You Eligible?
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The IRS has issued guidance to taxpayers on how to claim refunds for previously taxed dyed fuel. The guidance comes in the form of temporary and proposed regulations and includes a public comment period. Specifically, the regulations outline who may claim a refund and how.
This guidance is particularly important for taxpayers that incur excise tax on fuel that is later dyed and used for nontaxable purposes, as it clarifies eligibility and may create an opportunity to recover previously paid tax.
Background: Why Previously Taxed Dyed Fuel Was Ineligible
During the 2025 legislative session, Congress closed a loophole that prevented taxpayers from claiming a credit or refund when previously taxed fuel was later mechanically dyed at a terminal. Under this loophole, previously taxed fuel that was later dyed remained treated as tax-paid. As dyed fuel is exempt from tax, the previously paid tax (when the fuel was removed from a terminal as clear fuel) could not be passed along, leaving the taxpayer that dyed the fuel to absorb the tax cost.
What Section 6435 Allows
Congress added 26 USC Section 6435 to the Internal Revenue Code (IRC) through the One Big Beautiful Bill Act (OBBBA). The code section allows for a refund of tax paid on diesel or kerosene that is subsequently dyed and qualifies as exempt from federal excise tax on fuel. The refund applies to both the excise tax and the Leaking Underground Storage Tank (LUST) tax.
The new code section did not include directives on treating payments of previously paid tax as refunds of overpayments, nor did it provide a specific appropriation for such payments. As a result, only the general refund appropriation may be used to pay these claims.
Under the general refund appropriation, the claimant must be the same person that originally paid the tax.
Temporary and Proposed Regulations
Who can claim the refund
Given the IRS interpretation that the refund can only go back to the original taxpayer, the temporary regulations provide that a taxpayer that paid the Section 4081 tax on diesel fuel or kerosene may seek a refund under Section 6435. To qualify, the taxpayer must subsequently remove the fuel from an approved terminal as eligible dyed fuel. The refund is only available when the original taxpayer that paid the Section 4081 tax is also the taxpayer that removes the dyed fuel from the terminal.
Conditions to qualify
The specific section states as follows:
(d) Conditions to allowance of refund. A claim for refund is allowed under section 6435 and this Section 48.6435-1T only if each of the following conditions is satisfied:
(1) Section 4081 tax was imposed with respect to diesel fuel or kerosene;
(2) The taxpayer was liable for and paid such tax to the IRS and the tax has not been credited or refunded;
(3) The taxpayer removes from an approved terminal the diesel fuel or kerosene, which has been dyed as provided in Section 4082(a); and
(4) The taxpayer meets the reporting requirements of paragraph (e) of this Section.
Reporting and documentation requirements
Taxpayers claiming the refund must include a report with the claim. The temporary regulations include a model report. The report requires the taxpayer to certify that except for the Section 6435 claim, it has not received and will not claim a credit or a refund for the tax on diesel fuel or kerosene. Additionally, the model report identifies and revokes any prior first taxpayer report filed under Section 48.4081-7(c) related to the same fuel.
A Section 6435 taxpayer’s report is filed once and when a taxpayer makes a Section 6435 claim. It does not need to be filed with the taxpayer’s Form 720 to which the Section 4081 tax relates.
The report is intended to address situations in which the taxpayer may not know the subsequent use or disposition of the fuel at the time the first tax is paid and reduce the administrative burden on the initial taxpayer.
How to File a Claim
Claims must be filed using Form 8849, Schedule 5.
Section 6435 claims cannot be filed on the same Form 8849 as other claims. For example, if a taxpayer had Section 6435 claims and superfund tax claims (Schedule 6), the taxpayer must file a separate claim for each.
The time for filing a claim:
- Begins after the dyed fuel is removed from the terminal
- Ends three years from the date the return was filed or two years from the date the tax was paid, whichever is later
Effective dates and applicability
The temporary regulations are enacted under 26 CFR Section 48.6435-1T. The rules apply to removals from a registered terminal of eligible dyed fuel on or after December 31, 2025, and remain in effect until the earlier of a statutory change to the law or May 1, 2029.
Challenges in the Regulations
Because Section 6435 did not include a specific appropriation mechanism for these refunds, the regulations only partially address the issue. Previously taxed dyed fuel may still remain within the distribution system.
The IRS recognizes this in the Temporary Regulations section, stating: “Given that these regulations limit the scope of eligible claimants under section 6435 to taxpayers that paid the underlying Section 4081 tax, taxpayers also need certainty as soon as possible to enable them to structure their business arrangements in a manner that results in eligibility for the section 6435 payment.”
In other words, the IRS acknowledges that taxpayers need clarity to structure transactions in a way that preserves refund eligibility.
The proposed regulations mirror the temporary regulations but include a notice and comment period. Comments are expected to address the limitations on eligible claimants. However, absent additional congressional action, the IRS is unable to expand the scope of eligible claimants.
How Weaver Can Help
Understanding the requirements and limitations surrounding Section 6435 claims can be complex, particularly when determining eligibility and filing requirements. Weaver’s motor fuels and excise tax team can help you evaluate your position and support the claims process. Contact us to learn more.
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