I wouldn't worry about the kittens getting milk. Not all cats get upset tummies from milk. It at least adds some nutrients to whatever cheapo food they are getting.

For now, so long as the dog is getting basic needs met and is spayed, try not to obsess too much because nobody is going to take the dog away from her. As you said, she'll probably get rid of it sooner or later. In the meantime, make an anonymous email tip to any shelter she gets animals from so they know not to adopt out to her anymore.