diff --git a/docs/source/middleware/index.rst b/docs/source/middleware/index.rst
index 8b5350c9e0881..9004e66851d55 100644
--- a/docs/source/middleware/index.rst
+++ b/docs/source/middleware/index.rst
@@ -6,6 +6,7 @@ Middleware Daemon
     :caption: Contents:
 
     development.rst
+    state.rst
     process_pool.rst
     jobs.rst
     roles.rst
diff --git a/docs/source/middleware/state.rst b/docs/source/middleware/state.rst
new file mode 100644
index 0000000000000..b4d1c370f6fc5
--- /dev/null
+++ b/docs/source/middleware/state.rst
@@ -0,0 +1,63 @@
+Middleware State Directories
+############################
+
+.. contents:: Table of Contents
+    :depth: 4
+
+The middlewared process stores state in several directories on the local filesystem. There
+are many situations in which the developer may opt to store state information outside of the
+configuration database. In this case the onus is on the developer to choose an appropriate
+location for this state based on persistence requirements. The following is a brief introduction
+to how volatile and persistent state is stored. The most up-to-date definitions for storage
+locations are in the truenas/middleware repository, and truenas/scale-build (for datasets
+created during installation and upgrade).
+
+
+Volatile state
+**************
+
+Volatile middleware state is stored in the middleware run directory `/var/run/middleware`.
+The expected permissions on the volatile state directory are 0o755. This is typically where
+sentinel files should be placed. This is defined by `MIDDLEWARE_RUN_DIR` in `middlewared/utils`.
+
+
+Persistent state
+****************
+
+There are several directories that are used to store persistent state related to the middlewared
+process and TrueNAS servers.
+
+`/conf` -- this ZFS dataset is readonly and contains configuration that is not expected to change at runtime.
+An example of this would be our audit rulesets or some metadata about the boot pool when it is installed.
+This dataset is not cloned during the upgrade process and information is not preserved as part of configuration
+backups.
+
+`/data` -- this ZFS dataset contains the TrueNAS configuration file `freenas-v1.db` and various install-specific
+configuration files that must persist across TrueNAS upgrades. Items that need to be included in the configuration
+tarball should generally be placed here. Permissions on this directory must be 0o755, but many files here should
+be set to 0o700. All files and directories should be owned by root:root.
+
+`/data/subsystems` -- this directory contains application-specific configuration that must persist between
+installs that is not suitable for datastore insertion. The convention is to create a new directory with the name of
+the middleware plugin that needs persistent state. Configuration information stored in these directories must be
+included in the TrueNAS configuration backup and restored on configuration upload.
+
+`/var/lib/truenas-middleware` -- this directory contains persistent middleware state that is applicable to the
+current boot environment only. It is a safe place to store data that we want to persist across reboots, but not
+across upgrades. This is defined by the `MIDDLEWARE_BOOT_ENV_STATE_DIR` in `middlewared/utils`. The permissions
+on this directory should be 0o755 and it should be owned by root:root.
+
+`/root` -- this dataset contains the middleware directory services cache. The permissions on this directory
+should be 0o700 and it should be owned by root:root.
+
+`/var/db/system` -- this is the mountpoint for the system dataset. The storage pool for the system dataset is
+runtime configurable and in single node systems may be located on the boot pool. If the server is an HA appliance
+the system dataset will always be on a data pool. Examples of when to place state in the system dataset are
+if the state must remain consistent for the active storage controller in an HA pair (for example nfs4 state file)
+or if we want the state's storage pool to be user-configurable. The system dataset mountpoint has expected
+permissions of 0o755 and ownership of root:root.
+
+`/audit` -- this is the dataset containing our auditing databases. It is cloned during the upgrade process and
+so persists across upgrades. The auditing databases are not expected to be preserved during backup and restore
+operations and are unique to the individual truenas install. Expected permissions are 0o700 and owned by root:root.
+Procedure for adding new audit databases are documented separately.
diff --git a/src/middlewared/middlewared/alert/source/audit.py b/src/middlewared/middlewared/alert/source/audit.py
index 3a2d0ee0f74d6..37a02ed40724e 100644
--- a/src/middlewared/middlewared/alert/source/audit.py
+++ b/src/middlewared/middlewared/alert/source/audit.py
@@ -14,13 +14,6 @@ class AuditBackendSetupAlertClass(AlertClass, SimpleOneShotAlertClass):
     text = "Audit service failed backend setup: %(service)s. See /var/log/middlewared.log"
 
 
-class AuditSetupAlertClass(AlertClass, SimpleOneShotAlertClass):
-    category = AlertCategory.AUDIT
-    level = AlertLevel.ERROR
-    title = "Audit Service Setup Failed"
-    text = "Audit service failed to complete setup. See /var/log/middlewared.log"
-
-
 # --------------- Monitored Alerts ----------------
 class AuditServiceHealthAlertClass(AlertClass):
     category = AlertCategory.AUDIT
diff --git a/src/middlewared/middlewared/plugins/audit/__init__.py b/src/middlewared/middlewared/plugins/audit/__init__.py
index 885953cb45221..a1078f8c16dbf 100644
--- a/src/middlewared/middlewared/plugins/audit/__init__.py
+++ b/src/middlewared/middlewared/plugins/audit/__init__.py
@@ -1,13 +1,16 @@
+async def init_audit(middleware, event_type, args):
+    if await middleware.call('system.boot_env_first_boot'):
+        try:
+            await middleware.call("audit.setup")
+        except Exception:
+            middleware.logger.error("Failed to perform setup tasks for auditing.", exc_info=True)
+
+
 async def setup(middleware):
+    middleware.event_subscribe('system.ready', init_audit)
+
     try:
         # Set up connections to the auditing databases
         await middleware.call("auditbackend.setup")
     except Exception:
         middleware.logger.error("Failed to set up auditing backend.", exc_info=True)
-    if await middleware.call("keyvalue.get", "run_migration", False):
-        # If this is an upgrade then free up space used by refreservation on
-        # deactivated boot environments
-        try:
-            await middleware.call("audit.setup")
-        except Exception:
-            middleware.logger.error("Failed to perform setup tasks for auditing.", exc_info=True)
diff --git a/src/middlewared/middlewared/plugins/audit/audit.py b/src/middlewared/middlewared/plugins/audit/audit.py
index 93ed9064c1d98..51d7a8af0b333 100644
--- a/src/middlewared/middlewared/plugins/audit/audit.py
+++ b/src/middlewared/middlewared/plugins/audit/audit.py
@@ -550,9 +550,9 @@ async def setup(self):
         configuration to the current boot environment.
         """
         try:
-            os.mkdir(AUDIT_REPORTS_DIR, 0o700)
+            await self.middleware.run_in_thread(os.mkdir, AUDIT_REPORTS_DIR, 0o700)
         except FileExistsError:
-            os.chmod(AUDIT_REPORTS_DIR, 0o700)
+            await self.middleware.run_in_thread(os.chmod, AUDIT_REPORTS_DIR, 0o700)
 
         cur = await self.middleware.call('audit.get_audit_dataset')
         parent = os.path.dirname(cur['id'])
@@ -589,13 +589,10 @@ async def setup(self):
                     'cleanup may be required', ds['id'], exc_info=True
                 )
 
-        # Dismiss any existing AuditSetup one-shot alerts
-        await self.middleware.call('alert.oneshot_delete', 'AuditSetup', None)
         audit_config = await self.middleware.call('audit.config')
         try:
             await self.middleware.call('audit.update_audit_dataset', audit_config)
         except Exception:
-            await self.middleware.call('alert.oneshot_create', 'AuditSetup', None)
             self.logger.error('Failed to apply auditing dataset configuration.', exc_info=True)
 
         # Generate the initial truenas_verify file
diff --git a/src/middlewared/middlewared/plugins/system/__init__.py b/src/middlewared/middlewared/plugins/system/__init__.py
index 6d18bd6808e58..afa1bad847452 100644
--- a/src/middlewared/middlewared/plugins/system/__init__.py
+++ b/src/middlewared/middlewared/plugins/system/__init__.py
@@ -3,7 +3,7 @@
 
 from middlewared.utils import BOOTREADY
 
-from .utils import FIRST_INSTALL_SENTINEL, lifecycle_conf
+from .utils import FIRST_INSTALL_SENTINEL, BOOTENV_FIRSTBOOT_SENTINEL, lifecycle_conf
 
 
 def firstboot(middleware):
@@ -20,6 +20,15 @@ def firstboot(middleware):
             middleware.call_sync('datastore.update', 'system.advanced', config['id'], {'adv_autotune': True})
 
 
+def firstboot_after_upgrade(middleware):
+    if not os.path.exists(BOOTENV_FIRSTBOOT_SENTINEL):
+        os.makedirs(os.path.dirname(BOOTENV_FIRSTBOOT_SENTINEL), mode=0o700)
+        with open(BOOTENV_FIRSTBOOT_SENTINEL, 'w'):
+            pass
+
+        lifecycle_conf.SYSTEM_BOOT_ENV_FIRST_BOOT = True
+
+
 def read_system_boot_id(middleware):
     try:
         with open('/proc/sys/kernel/random/boot_id', 'r') as f:
@@ -36,6 +45,7 @@ async def setup(middleware):
     middleware.event_register('system.shutdown', 'Started shutdown process', roles=['SYSTEM_GENERAL_READ'])
 
     await middleware.run_in_thread(firstboot, middleware)
+    await middleware.run_in_thread(firstboot_after_upgrade, middleware)
 
     settings = await middleware.call('system.general.config')
     middleware.logger.debug('Setting timezone to %r', settings['timezone'])
diff --git a/src/middlewared/middlewared/plugins/system/lifecycle.py b/src/middlewared/middlewared/plugins/system/lifecycle.py
index 82d528733862a..4ee2cdfe2a065 100644
--- a/src/middlewared/middlewared/plugins/system/lifecycle.py
+++ b/src/middlewared/middlewared/plugins/system/lifecycle.py
@@ -23,6 +23,11 @@ class SystemService(Service):
     async def first_boot(self):
         return lifecycle_conf.SYSTEM_FIRST_BOOT
 
+    @private
+    async def boot_env_first_boot(self):
+        # First boot after upgrading server
+        return lifecycle_conf.SYSTEM_BOOT_ENV_FIRST_BOOT
+
     @api_method(
         SystemBootIdArgs,
         SystemBootIdResult,
diff --git a/src/middlewared/middlewared/plugins/system/utils.py b/src/middlewared/middlewared/plugins/system/utils.py
index c650be1d69d86..02fb32a2239ed 100644
--- a/src/middlewared/middlewared/plugins/system/utils.py
+++ b/src/middlewared/middlewared/plugins/system/utils.py
@@ -1,11 +1,12 @@
 import os
 import re
 
-from middlewared.utils import MIDDLEWARE_RUN_DIR
+from middlewared.utils import MIDDLEWARE_RUN_DIR, MIDDLEWARE_BOOT_ENV_STATE_DIR
 
 
 DEBUG_MAX_SIZE = 30
 FIRST_INSTALL_SENTINEL = '/data/first-boot'
+BOOTENV_FIRSTBOOT_SENTINEL = os.path.join(MIDDLEWARE_BOOT_ENV_STATE_DIR, '.first-boot')
 RE_KDUMP_CONFIGURED = re.compile(r'current state\s*:\s*(ready to kdump)', flags=re.M)
 
 
@@ -17,6 +18,8 @@ def __init__(self):
         self.SYSTEM_READY = False
         # Flag telling whether the system is shutting down
         self.SYSTEM_SHUTTING_DOWN = False
+        self.SYSTEM_BOOT_ENV_FIRST_BOOT = False
+        # Flag telling whether this is the first boot for the boot environment
 
 
 def get_debug_execution_dir(system_dataset_path: str, iteration: int = 0) -> str:
diff --git a/src/middlewared/middlewared/utils/__init__.py b/src/middlewared/middlewared/utils/__init__.py
index c2a473e619816..d5ef5905a9ad6 100644
--- a/src/middlewared/middlewared/utils/__init__.py
+++ b/src/middlewared/middlewared/utils/__init__.py
@@ -34,6 +34,7 @@ class ProductNames:
 
 MID_PID = None
 MIDDLEWARE_RUN_DIR = '/var/run/middleware'
+MIDDLEWARE_BOOT_ENV_STATE_DIR = '/var/lib/truenas-middleware'
 MIDDLEWARE_STARTED_SENTINEL_PATH = f'{MIDDLEWARE_RUN_DIR}/middlewared-started'
 BOOTREADY = f'{MIDDLEWARE_RUN_DIR}/.bootready'
 BOOT_POOL_NAME_VALID = ['freenas-boot', 'boot-pool']
diff --git a/tests/api2/test_audit_alerts.py b/tests/api2/test_audit_alerts.py
index ac1d64a9c9b85..060b1b3824f3f 100644
--- a/tests/api2/test_audit_alerts.py
+++ b/tests/api2/test_audit_alerts.py
@@ -81,29 +81,6 @@ def test_audit_backend_alert(setup_state):
     assert class_alerts[0]['formatted'].startswith("Audit service failed backend setup"), class_alerts
 
 
-@pytest.mark.parametrize(
-    'setup_state', [
-        [None, 'AuditSetup', 'audit.setup']
-    ],
-    indirect=True
-)
-def test_audit_setup_alert(setup_state):
-    with mock("audit.update_audit_dataset", """
-        from middlewared.service import private
-        @private
-        async def mock(self, new):
-            raise Exception()
-    """):
-        unused, alert_class, audit_method = setup_state
-        call(audit_method)
-        sleep(1)
-        alerts = call("alert.list")
-        class_alerts = [alert for alert in alerts if alert['klass'] == alert_class]
-        assert len(class_alerts) > 0, class_alerts
-        assert class_alerts[0]['klass'] == 'AuditSetup', class_alerts
-        assert class_alerts[0]['formatted'].startswith("Audit service failed to complete setup"), class_alerts
-
-
 def test_audit_health_monitor_alert():
     with mock("auditbackend.query", """
         from middlewared.service import private