Fuel tax expirations and new refund provisions require IRS guidance and improved administration

Editor: Mary Van Leuven, J.D., LL.M.

Federal excise taxes (FETs) are a cornerstone of the U.S. tax system, providing targeted funding for government programs and influencing consumer behavior. Unlike income taxes, excise taxes are imposed on specific services, transactions, and goods. Items subject to excise taxes are motor fuels, air transportation, beer, wine, distilled spirits, hazardous chemicals, and many others. Several of these taxes and credits have expired or are scheduled to expire soon, raising important questions for businesses, tax professionals, and policymakers. In addition, administrative changes being implemented by the IRS create another layer of complexity for taxpayers.

This item explores FETs, focusing on fuel taxes and credits that have recently lapsed or will sunset in the next few years. It also discusses the implications of administrative changes at the IRS, including electronic payments and refunds and uncertainty about how to communicate effectively with the IRS on FET issues.

Understanding FETs and the IRS process

The Internal Revenue Code contains numerous excise tax provisions, each with its own tax rate, tax base, and expiration date. For example, some FETs, including many fuel excise taxes, are levied at the manufacturer, producer, or importer level and are typically passed on in the form of higher prices. Others are imposed on payments for various goods or services, such as tickets for air transportation. Excise taxes serve various purposes, including funding infrastructure, environmental remediation, and health initiatives.

Fuel excise taxes are reported to the IRS on Form 720, Quarterly Federal Excise Tax Return. The reporting requirements for FETs, which are designed to ensure timely collection and compliance, create a web of deadlines and forms that can be difficult to track. For example, taxpayers must often calculate and deposit excise taxes on a semimonthly basis, then reconcile these deposits with the actual liability determined upon filing the quarterly return. Overpayments can occur if deposits exceed liability or fail to take into account allowable credits, such as those reported on Schedule C, Claims, of Form 720. These deposits are easily misapplied in the IRS system to other tax types, whether due to taxpayer error or actions taken by the IRS. Further, processing delays in the IRS Service Centers have resulted in the issuance of automated IRS correspondence requiring taxpayers to contact the IRS.

Because the FET regime is distinct from the income tax regime, the IRS maintains a separate staff of excise tax specialists dedicated to serving FET taxpayers. Moreover, IRS phone representatives answering the “business and specialty” or “practitioner priority” service lines are generally not trained on FETs and cannot provide assistance with FET issues. Instead, Internal Revenue Manual Section 4.24.22.3.1(1) advises IRS phone representatives that a caller with an account issue related to excise taxes must be transferred to the “excise hotline.” Unfortunately, as discussed below, the excise hotline has frequently been disabled and was turned off beginning in May 2025. Therefore, despite many IRS procedural changes and statutory changes such as expiring provisions, taxpayers often lack access to qualified resources at the IRS when FET questions arise.

Changes to fuel-related excise taxes and credits

Oil spill tax expiration: Sec. 4611 imposes an FET on crude oil and imported petroleum products, such as finished gasoline and other conventional fuels, as well as any liquid hydrocarbon refinery product. Sec. 4611 contains two “financing rates” — the Oil Spill Tax (OST) rate and the Hazardous Substance Superfund financing rate, better known as the Superfund excise tax (SET). The SET was reinstated after many years on hiatus in 2023. However, the OST rate expired Dec. 31, 2025.

The rates fund two separate federal trust funds. The SET funds the Superfund, which is the federal government’s nationwide program to clean up locations contaminated with hazardous chemicals when the responsible party cannot be found or is unable to perform the remediation. The SET financing rate is indexed to inflation and is currently 18 cents per barrel for petroleum. The 9–cents–per–barrel OST funded the Oil Spill Liability Trust Fund, which supports federal responses to oil spills and related environmental disasters. The IRS confirmed the expiration of the OST in Announcement 2026–2, released Jan. 7, 2026, clarifying that for 2026, only the Superfund financing tax applies to crude oil and imported petroleum products. The OST has a history of lapsing and being reinstated by Congress. It previously expired in 1994, was reinstated in 2006, expired again in 2018, was reinstated again in 2020, and now has expired effective Jan. 1, 2026. Given this precedent, it remains possible that Congress will reinstate the OST in the future and taxpayers will need timely guidance.

Other expirations possible for fuel-related FETs: Other fuel FETs are slated to expire or be reduced in the next few years, with significant implications for affected industries, infrastructure expenditures, and environmental remediation. Sec. 4081 generally imposes FETs on conventional motor fuels, including gasoline and diesel fuel (taxable fuel). The current rate of tax is 18.3 cents per gallon for gasoline and 24.3 cents per gallon for diesel. Even though these rates have been unchanged since 1993, Sec. 4081(d)(1) provides that after Sept. 30, 2028, the rate of tax will be 4.3 cents per gallon.

The taxes on taxable fuel generally fund the Highway Trust Fund. The Highway Trust Fund is used to fund government activities related to mass transit and interstate highways and to send funds to the states for road infrastructure maintenance and repair.

Sec. 4081 also includes a 0.1 cent per gallon additional tax known as the Leaking Underground Storage Tank Trust Fund financing rate (LUST). LUST is used to fund cleanup activities related to leaking underground storage tanks. LUST is set to expire Sept. 30, 2028. Therefore, unless Congress acts to update these tax rates, the Highway Trust Fund and LUST Trust Fund will be dramatically reduced beginning in 2028. These changes would require clear guidance for taxpayers to remain compliant.

Changes to fuel tax credits for alternative and renewable fuel and dyed diesel: In 2024, taxpayers saw the expiration of a patchwork of alternative and renewable fuel tax credits that were largely administered as excise tax credits and payments. These credits were all replaced in 2025 by the Sec. 45Z clean fuel production credit. Other alternative and renewable fuel credits that were treated as nonrefundable general business tax credits also expired at the end of 2024 and were replaced by Sec. 45Z. The consolidation and replacement of the legacy alternative and renewable fuel tax credits was a massive shift for taxpayers who had been accustomed to the excise tax credit regime for decades.

In addition, a new credit, effective Jan. 1, 2026, would allow a refund for dyed diesel in certain cases. The IRS issued temporary regulations in April 2026 (REG–119294–25) establishing procedures for submitting a dyed fuel refund claim and providing that, absent a statutory change, Treasury and the IRS lack the authority to pay Sec. 6435 claims to anyone other than the person that paid the Sec. 4081 tax with respect to the eligible dyed fuel to which the claim relates.

Recent IRS procedural changes: Electronic payments and refunds

In March 2025, the regime for excise tax payments and refunds shifted significantly with the issuance of Executive Order 14247, Modernizing Payments to and From America’s Bank Account. This order requires federal agencies, including the IRS, to transition payments and refunds to electronic methods. Taxpayers can already use the Electronic Federal Tax Payment System (EFTPS) or wire transfers to make excise tax payments, but the process for receiving refunds is less straightforward.

Currently, no excise tax forms filed by paper with the IRS allow the taxpayer to include bank account and routing information for direct deposit refunds. For example, Form 720 allows taxpayers to report an overpayment if deposits exceed the liability or for excess credits; however, the refund is typically issued by paper check. The IRS announced plans to add direct deposit options to most business tax return types beginning after Sept. 30, 2025. According to IRS Fact Sheet 2026–02, Topic C (added Jan. 27, 2026):

In the first year of implementation, after Sept. 30, 2025, the IRS will be adding the direct deposit option to most business tax return types. This will allow more businesses to receive refunds faster and more securely through electronic deposit. Over time, paper check refunds for businesses will be phased out. The IRS will accept checks when electronic payment methods are not available for a certain transaction type or in specific situations such as those involving hardships and/or legal and procedural requirements.

While this transition promises greater efficiency and security, it also creates uncertainty for taxpayers that are accustomed to paper checks and may not be aware of the new procedures. Furthermore, until paper forms are updated to include banking information, taxpayers will be unable to receive direct deposit refunds.

Communication breakdown: The IRS excise tax hotline

Perhaps the most frustrating development for excise tax filers and practitioners is the near–total breakdown in communication with the IRS regarding excise tax matters. As noted in IRS Publication 5316, Internal Revenue Service Advisory Council Public Report (January 2026, page 45):

[T]axpayers have been unable to speak with the IRS regarding … excise tax matters since late May 2025 due to the specific excise tax hotline … being unstaffed. Taxpayers and tax practitioners who call this hotline hear a prerecorded message stating that the hotline is not currently being answered due to staffing limitations. Despite this fact, the practitioner hotline and the general IRS hotlines continue to refuse to service any excise tax matters. The IRS staff assigned to these other hotlines instead continue to transfer taxpayers and tax practitioners wishing to discuss excise tax matters to the unstaffed excise tax hotline. As a result, the IRS has not been servicing excise tax return filers … and the tax practitioners who support them since late May 2025.

This lack of support causes difficulty in resolving issues, clarifying uncertainties, or obtaining guidance on new developments. The timing could not be worse, given the recent changes in payment and refund procedures and the ongoing confusion surrounding expiring and reinstated fuel taxes and credits.

A time of change and challenge

FETs have always been a challenging area of tax compliance, but recent developments have made this area even more complex. The transition to electronic payments and refunds, the breakdown in IRS communication, and the perpetual uncertainty of expiring taxes all demand greater vigilance and adaptability from taxpayers and practitioners.

While the IRS is working to modernize its systems and improve efficiency, the lack of direct support and the frequent changes in excise tax rules create significant risks. Tax departments must take proactive steps to assign responsibility, stay informed, and prepare for new procedures. By doing so, they can traverse the terrain of FET compliance and avoid costly mistakes.

Editor

Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.

For additional information about these items, contact Van Leuven at mvanleuven@kpmg.com.

Contributors are members of or associated with KPMG LLP.

The information in these articles is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230. The information contained in these articles is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. These articles represent the views of the authors only and do not necessarily represent the views or professional advice of KPMG LLP.