Sure it works, and it's a very simple technology that lends itself to small co-ops and homebrewing. The chemical process is fairly straightforward, low energy and doable at home.
Dr. Rudolf Diesel intended that his engine use vegetable oil for fuel. It doesn't work on modern engines because the fuel injection systems are optimized for the (then) cheaper mineral diesel fuel, which is much thinner (less viscous) at cold temperatures. So you have two choices.
1. Modify the fuel to make it thinner, or,
2. Modify the car to deal with thicker fuel.
Choice 1 is biodiesel. You don't have to modify the car. That's the whole point of brewing biodiesel :)
Choice 2 lets you use veggie oil straight. It involves heaters to warm the fuel, to make it thin enough to work in the injectors. This lets you use oil intended for french fry machines, which was $2.59/gal at CostCo last I looked.
You can also use waste oil, i.e. used fry oil a restaurant is throwing out, however aside from viscosity, waste oil also has issues with particulate, acidity and water content. Treating it is nearly as hard as brewing biodiesel.
As far as the IRS,
a) you need to pay road tax on the dollar value of any fuel you use in a vehicle on the highway.
b) there are tax credits for use of biofuels.
I believe they cancel each other out, or are a bit in your favor.