Assume you have a client with a Schedule K-1 showing a loss in a nonresident state.  Two years from now IRS audits the partnership return, disallows many of the deductions and determines that there was really a substantial profit. The nonresident state filing requirement is based on gross income, not on adjusted gross income or taxable income.  When the nonresident state assesses tax based on the IRS audit, who should pay the penalties and interest?