The distribution of foundation assets poses a particular problem for regulators and anyone seeking to monitor the activities of the sector. Large foundations—few in number—are relatively easy to monitor and can afford, within reason, the resources needed to comply with regulatory requirements for information and pursue best practices. Further, the size of these institutions and the number of internal and external stakeholders in their affairs promote an institutional ethic of accountability. Because of these factors and the visibility of foundations, instances of misconduct tend to be self-corrected quickly. Not surprisingly, a 1984 IRS study of large foundations found this segment of the sector to be well run—a finding that weighed significantly in the IRS's decision to devote fewer resources to oversight of the sector.

But small foundations—extremely large in number—are much more difficult to track. As a group, small and very small foundations are the organizations that warrant particular attention because of the recent formation of many, their limited visibility and scarcity of stakeholders in their affairs, their varying knowledge of and ability to implement best practices, and the heterogeneity of their purposes and missions. Paradoxically, small foundations are also least able to afford significant regulatory burdens, particularly when the opportunity cost of such burdens is taken into account.

Monitoring the activities of some 57,000 small and very small foundations is made all the more difficult by the paucity of regulatory resources. When the 2 percent excise tax on foundations' net investment income was enacted in 1969, experts advised that a substantial portion of the revenues raised be dedicated to funding regulation of the sector by the IRS. That step was not taken, with the result that the IRS lacks the capacity to perform the oversight function most observers regard as necessary. Further, the nonprofit nature of the foundation sector, and the likely concentration of misconduct in small and very small institutions, results in comparatively little financial payoff from time spent by field agents in the sector.⁽⁶⁾

State attorneys general have a wide range of responsibilities, and the resources available to them are stretched very thin. Few have the capacity to analyze the voluminous reports submitted to them by foundations each year, with the result that virtually all rely on "whistleblower" reports from individuals or the media as a trigger for looking into a foundation's affairs. Regulatory shortcomings are further compounded by confidentiality considerations, which by law prevent the routine sharing between the IRS and state attorneys generals of much information on foundations.