Arizona Offer in Compromise Guide: Settle Tax Debt with the Department of Revenue for Less

A Complete Guide to Settling Your Arizona State Tax Debt for Less Than You Owe

Introduction

You're not alone if you're struggling to pay your Arizona state taxes. Many individuals and businesses cannot manage their tax liability due to job loss, illness, reduced income, or unexpected financial hardship. When back taxes, penalties, and interest pile up, it can feel impossible to catch up.

Fortunately, the Arizona Department of Revenue offers a solution for qualifying taxpayers: the Arizona Offer in Compromise program. This program allows eligible individuals and businesses to settle their state tax debt for less than the full amount owed. It’s not a payment plan or a temporary suspension—it’s a formal agreement that could reduce your tax bill and help you regain financial stability.

An offer in compromise can provide relief if you’re experiencing significant hardship and don’t have the income, assets, or resources to pay what you owe. Arizona’s program is separate from the IRS offer process and follows its rules under state law, including specific eligibility criteria, required documentation, and a thorough financial review.

This guide will walk you through everything you need to know about submitting an offer in compromise in Arizona. You’ll learn who qualifies, how to apply, what forms to file, and how the Arizona Department of Revenue and the Attorney General’s Office review your request. Whether you owe income taxes as an individual or are a business facing multiple tax issues, this guide can help you understand your options and take informed action.

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What's the Arizona Offer in Compromise?

The Arizona Offer in Compromise (OIC) is a legal option that allows qualifying taxpayers to settle their state tax debt for less than the total amount owed. It’s designed for individuals and businesses who cannot pay their full tax liability due to financial hardship or other exceptional circumstances. If accepted, the offer legally satisfies the outstanding tax obligation, and the taxpayer is considered fully paid.

This program is administered by the Arizona Department of Revenue and authorized under Arizona Revised Statutes §42-1004. It reflects the state’s recognition that, in some cases, collecting the full amount of back taxes would be unreasonable or cost more than it’s worth. Rather than pursue aggressive enforcement actions such as bank levies or tax liens, the state may agree to accept a reduced amount if doing so represents the most that can be collected based on the taxpayer's ability to pay.

Arizona’s OIC program is available on a case-by-case basis and involves a detailed review of the applicant’s income, expenses, assets, debts, and overall tax situation. If your financial information shows that paying the full tax bill would create significant hardship or be impossible within a reasonable time, the state may accept your offer.

Unlike an installment agreement, which requires monthly payments until the full debt is satisfied, an offer in compromise resolves the tax issue permanently if the offered amount is accepted and paid. Once the agreement is finalized and paid in full, the state will release any associated tax liens and mark the account as resolved.

It’s important to note that this program is separate from the IRS offer in compromise. Although both offer similar forms of tax relief, the state and federal programs are governed by different laws and procedures. Arizona’s OIC has its forms, guidelines, and approval process, including a final decision that must be reviewed by the Department of Revenue and the Attorney General.

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How Arizona’s OIC Differs from the IRS Program 

Although both the IRS and the Arizona Department of Revenue offer an offer in compromise program, they differ in key areas such as eligibility, documentation, and approval process. Understanding these differences is essential if you’re considering applying for relief from your tax debt at the state or federal level.

1. Eligibility and Qualification Criteria

• IRS OIC: The IRS evaluates your offer using detailed financial analysis. It reviews your income, monthly expenses, assets, and overall tax liability. You must demonstrate either doubt about collectability, liability, or exceptional circumstances under effective tax administration rules.
  
  
• Arizona OIC: Arizona’s program uses eight specific qualification questions that help determine whether a taxpayer is eligible. To qualify, you must typically answer “yes” to at least two questions. Rather than complex formulas, these focus on financial hardship, age, income sources, and business status.
  
  

2. Application Fees and Payment Requirements

• IRS: The IRS generally charges a $205 application fee, unless you meet low-income certification guidelines. Most applicants must also submit an initial payment with their offer.
  
  
• Arizona: Arizona does not require an upfront application fee. Instead, you must submit a specific dollar amount as your offer and indicate how the funds will be paid if accepted.
  
  

3. Processing Time

• IRS: Due to detailed case evaluations and a backlog, the IRS can take up to 24 months to review an offer in compromise.
  
  
• Arizona: Arizona typically processes offers within 90 days. While this is faster, the Attorney General’s Office must also review offers before final approval.
  
  

4. Documentation and Review Standards

Both programs require extensive financial documentation. However, Arizona has a more prescriptive list of needed items, such as:

• 90 days of bank account and credit card statements
  
  
• Pay stubs
  
  
• Tax returns
  
  
• Proof of income or medical hardship
  
  

Arizona’s offer is also reviewed by two separate offices—the Department of Revenue and the Attorney General. This makes the process highly structured but efficient when the documentation is complete.

5. Program Goals and Legal Authority

• IRS: Operates under federal tax law with national eligibility standards.
  
  
• Arizona: Governed by state law under Arizona Revised Statutes §42-1004. The goal is to reduce uncollectible tax bills and resolve liabilities that would otherwise be burdensome to enforce.

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Eligibility Criteria for Arizona Offer in Compromise 

To qualify for an Arizona Offer in Compromise, taxpayers must meet specific eligibility criteria set by the Arizona Department of Revenue. These requirements assess whether paying your full tax liability would create a significant hardship or if collecting the debt would cost more than it’s worth.

Arizona reviews offers on a case-by-case basis. However, the following qualification questions and legal requirements are critical starting points.

Arizona’s Eight Qualification Questions

You may be eligible for relief if you answer “yes” to at least two of the following questions:

• Do you receive Social Security, disability benefits, a pension, or public assistance?
  
  
• Are you over the age of 60?
  
  
• Are your total assets worth less than your tax debt?
  
  
• Have you had a significant reduction in income?
  
  
• Is your tax bill from a tax period more than seven years ago?
  
  
• Have all required tax returns been filed, and are they current?
  
  
• Are your licenses (individual or business) up to date?
  
  
• Is your business defunct, closed, or no longer operating?
  
  

These questions measure taxpayers' ability to pay and assess overall financial hardship.

Additional Legal and Financial Requirements

In addition to the qualification questions, your offer must meet legal standards under Arizona Revised Statutes §42-1004. Arizona may grant relief if:

• Your tax liability is determined to be uncollectible based on your financial information, or
  
  
• The administrative costs of collecting the full amount exceed the benefit to the state.
  
  

Compliance and Restrictions

Before submitting an offer, you must meet the following conditions:

• Tax returns: All required personal and business tax returns must be filed for the past three years
  
  
• Licensing: Any applicable business licenses must be current
  
  
• Bankruptcy status: You cannot apply if you are in active bankruptcy proceedings
  
  
• Payment behavior: Arizona expects that taxpayers will not attempt to avoid payments once an offer is under review
  
  

Failing to meet any of these conditions will result in your offer being rescinded, regardless of your financial situation.

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Step-by-Step Guide to Applying for an Arizona OIC 

Applying for an Arizona Offer in Compromise requires careful planning, documentation, and attention to legal and procedural requirements. Follow the steps below to ensure your application is complete and has the best chance of being accepted by the Arizona Department of Revenue and the Attorney General’s Office.

1. Assess Your Eligibility

Before gathering paperwork, determine if you qualify:

• Review the eight qualification questions.
  
  
• Confirm you meet at least two criteria.
  
  
• Ensure all required tax returns have been filed.
  
  
• Verify that you are not currently in bankruptcy.
  
  
• Confirm your tax liability meets state hardship or administrative cost standards under Arizona Revised Statutes.
  
  

2. Gather Required Documentation

You must provide financial information to support your inability to pay your tax debt. The documents you’ll need vary depending on whether you’re applying as an individual or a business.

For individual taxpayers:

• You must submit a completed and signed Statement of Offer (Form 11005) stating your proposed settlement amount and justification for the offer.
  
  
• Include Form 10896 – Collection Information Statement (Personal), with all required financial attachments that outline your income, assets, and monthly expenses.
  
  
• Provide the last three pay stubs for all household members to verify income and employment status.
  
  
• Submit 90 days’ bank account statements for all personal accounts to demonstrate current financial activity and available funds.
  
  
• Include 90 days of credit card statements for all personal accounts to show monthly payment obligations and credit usage.
  
  
• Attach your most recent federal tax return to support income verification and confirm recent tax filing compliance.
  
  
• Provide income documentation from sources such as Social Security, disability payments, or pension distributions, if applicable.
  
  
• Include copies of medical bills, court orders, or child support obligations to support claims of financial hardship or extraordinary expenses.
  
  
• If relevant, submit student loan statements and copies of rental agreements to verify ongoing financial commitments.

For business taxpayers:

• Submit a completed and signed Statement of Offer (Form 11005) stating the business’s proposed compromise amount and payment plan.
  
  
• Include Form 10847 – Collection Information Statement (Business), detailing the business’s assets, liabilities, revenue, and monthly expenses.
  
  
• Provide a copy of the business’s most recent federal tax return to confirm reported income and compliance with tax obligations.
  
  
• Include 90 days of business bank account statements and credit card transaction histories to demonstrate business cash flow and current liabilities.
  
  
• If the business is no longer operating, include documentation confirming the defunct business status, such as dissolution papers or final tax filings.

Incomplete documentation is one of the most common reasons for delayed or rejected offers.

3. Complete the Statement of Offer

This is the core of your application. Make sure to:

• List the exact balance due and specify your offer amount.
  
  
• Provide the source of funds you’ll use to pay the offer, such as savings or help from creditors.
  
  
• Explain your reason for requesting the compromise (e.g., financial hardship, significant medical issues).
  
  
• Disclose any open IRS offer in compromise.
  
  
• Ensure all responsible parties (spouses, business partners, or corporate officers) sign the form.
  
  

4. Complete the Appropriate Financial Statement

• Individuals: Complete Form 10896
  
  
• Businesses: Complete Form 10847
  
  

All financial entries must be accurate, current, and supported by documentation. Missing or outdated information may result in rejection.

5. Submit Your Application Package

You can submit your complete application to the Arizona Department of Revenue using any of the following methods:

• Mail: PO Box 29070, Phoenix, AZ 85038-9070
  
  
• Email: oicprocessing@azdor.gov
  
  
• In Person: Drop off at any Arizona Department of Revenue office.
  
  
• Through a Field Representative: If working directly with ADOR staff
  
  

Be sure to keep a complete copy of everything you submit.

6. Stay Compliant During the Review Process

While your offer is under review:

• Continue making payments if you have an existing installment agreement.
  
  
• Stay current on all new taxes owed.
  
  
• Respond quickly to any requests for additional information.
  
  
• Notify the department of any change in address or contact information.
  
  

Arizona typically issues a final decision within 90 days. However, the review may take longer if documents are missing or your financial situation changes.

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Required Forms and Documentation

To apply for an Arizona offer in compromise, you must complete the correct forms and submit financial documentation supporting your claim of financial hardship or inability to pay. The Arizona Department of Revenue and the Attorney General’s Office will use this information to determine whether your tax liability qualifies for settlement.

While the list may vary slightly depending on your situation, the following forms and documents are generally required.

Required Forms

• Statement of Offer (Form 11005): This is the core application form where you state your offer amount, reason for compromise, and how you plan to fund the payment.
  
  
• Collection Information Statement:
  Use Form 10896 if you are applying as an individual or Form 10847 if you are applying on behalf of a business. These forms summarize your financial information, including assets, income, debts, and monthly payments.
  
  

Supporting Documentation

• Submit your most recent federal tax return to confirm income, tax filing history, and reporting accuracy.
  
  
• Provide 90 days of bank account statements for all checking, savings, and business accounts to show available funds and recent financial activity.
  
  
• Include the last three pay stubs for each wage earner in the household to support reported income.
  
  
• Attach 90 days of credit card statements for all open accounts to show outstanding balances and monthly payments.
  
  
• Include documentation of alternative income sources, such as Social Security, pension payments, or disability benefits, if applicable.
  
  
• If you claim financial hardship, provide supporting items such as medical bills, court-ordered payments, or proof of student loans and rent expenses.
  
  

Minimizing paperwork errors is critical. Before you submit your package, make sure your forms are signed, the dates are correct, and all financial records are current.

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Common Mistakes That Delay or Deny OIC Applications 

Even if you qualify for an Arizona offer in compromise, errors in your application can lead to delays or outright denial. Many of these mistakes are preventable and result from missing documents, unrealistic offers, or noncompliance with basic requirements.

To improve your chances of acceptance, carefully review your submission for the following common issues:

Incomplete or Outdated Documentation

• Missing financial records: Failing to include all required bank statements, credit card summaries, or income documentation may result in automatic rejection.
  
  
• Outdated information: Arizona typically requires the most recent 90 days of financial activity. Submitting old records may prevent a timely or fair evaluation of your tax situation.
  
  
• Unsigned forms: All responsible parties—such as spouses, partners, or corporate officers—must sign the Statement of Offer and financial statements. Missing signatures make the application legally invalid.
  
  

Filing and Licensing Noncompliance

• Unfiled tax returns: Arizona will not review your offer if any required personal or business tax returns remain unfiled. This includes delinquent returns from previous tax periods.
  
  
• Outdated licenses: Business applicants must have all licenses current at the time of application. If a required license has lapsed, the offer may be denied.
  
  
• Active bankruptcy: If you are currently in bankruptcy proceedings, you are not eligible for an Arizona offer in compromise.
  
  

Offer Amount Issues

• No specific dollar amount: Offers that do not clearly state a settlement amount will not be considered. Arizona does not accept vague offers or requests for the department to determine what is reasonable.
  
  
• Unrealistic low offers: If your proposed amount does not align with your financial information, the state may reject it. Your offer should reflect your maximum ability to pay based on your assets, income, and expenses.
  
  

Poor Communication During Review

• Failure to respond: If the department requests additional financial information or clarification, delayed or incomplete responses may result in your offer being returned.
  
  
• Address changes: If your mailing address changes and you do not notify the department, you may miss critical correspondence about your case or final decision.
  
  

Avoiding these mistakes can help ensure that the Arizona Department of Revenue and the Attorney General’s Office review your offer promptly and fairly.

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What Happens After Your Offer Is Accepted or Rejected 

Once you submit your Arizona offer in compromise, the Department of Revenue and the Attorney General’s Office will review your financial information, offer amount, and supporting documents. Within approximately 90 days, you will receive a final decision on whether your offer has been accepted or rejected.

If Your Offer Is Accepted

An accepted offer means your tax liability is fully paid once you submit the agreed-upon amount. In this case:

• Tax liens will be released. Once the payment is received and processed, the state will remove any tax lien filed against your property or bank accounts.
  
  
• Collection actions stop. If you were facing wage garnishments, bank levies, or other enforcement actions, these will be permanently lifted once the compromise is finalized.
  
  
• Future compliance is required. To keep the agreement in good standing, you must file all future tax returns on time and pay any new taxes by the due date.
  
  
• The offer amount must be paid in full. If you fail to pay the agreed amount outlined in the offer terms, the agreement may be revoked and full liability reinstated.
  
  

If Your Offer Is Rejected

If your offer is not accepted:

• You will receive a notice of rejection. Arizona does not offer a formal appeal process, but you may reapply if your financial situation changes.
  
  
• Existing tax debt remains active. Collection efforts may resume, including interest and penalties.
  
  
• You may consider a payment plan. If you cannot qualify for a compromise, an installment agreement may allow you to pay your back taxes in monthly payments.
  
  

Understanding the outcome and your responsibilities is essential. Whether your offer is accepted or rejected, maintaining compliance with Arizona tax laws is the best way to avoid future penalties and tax issues.

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Do You Need a Tax Professional to Help With an Arizona OIC?

While hiring a professional when applying for an Arizona offer in compromise is not required, working with a qualified tax expert can significantly improve your chances of success, especially if your tax situation is complex or you're unsure how to provide accurate financial information.

When to Consider Hiring Help

You may benefit from professional assistance if:

• You owe back taxes across multiple periods and need help organizing your financial records.
  
  
• You’re unsure how to complete the required forms or calculate a realistic offer amount based on your taxpayer’s ability to pay.
  
  
• You have received notices of enforcement actions, such as tax liens or bank levies.
  
  
• You want guidance in interpreting Arizona Revised Statutes or understanding the state’s administrative costs and hardship evaluation process.
  
  
• You also pursue an IRS offer or installment agreement and need help coordinating both applications.
  
  

Types of Professionals Who Can Help

• Enrolled agents are federally authorized to represent taxpayers before the IRS and are experienced in offering compromise programs.
  
  
• CPAs: Offer detailed financial guidance and may assist in determining your eligibility under state and federal guidelines.
  
  
• Tax attorneys: Can provide legal advice and assist with more complex legal or business-related tax issues, especially when dealing with the Attorney General’s Office.
  
  

Although hiring a professional involves additional cost, their expertise can help you avoid critical errors, meet application requirements, and present your financial hardship in the most persuasive way possible.