1. Depends. Are you boiling the full volume? If you're not, reduce the extract by the same proportion you reduce the boil volume. For example, if you're boiling three gallons, reduce the extract added at the beginning of the boil by roughly 2/3. In that case, I'd boil the LME and reserve the DME for a late addition.
2. Adding your peel at flameout is an excellent idea. I suspect your recipe instructions rely on some misinformation from the early days of homebrewing, when it was thought that you had to boil everything or you'd end up with a horrible infection. You don't. You also don't need to grind up dried citrus peel. There's no point.
2a. I do not agree with the automatic assumption that fresh zest yields "better" results. I have yet to see blind taste-test data which supports that conclusion.* The bitter orange peel is a very specific ingredient with a very specific flavor profile which cannot be replicated by blithely substituting something else. Unless, of course, you have access to bitter Curacao oranges in your local grocer's. Which I'm betting nobody does. For those other experienced brewers who are going to argue with me, let me give you a metaphor. If you're after the characteristic hops flavor of Sierra Nevada Pale Ale, you use what variety of hops? Cascades. That's it. That's the ingredient which gives the beer its characteristic flavor profile. You don't switch to, say, Amarillo merely "because it's fresher and it's citrusy". Bitter Curacao orange peel has just as characteristic a flavor profile. It is to Witbier, to continue the example, as Cascades hops are to SNPA. Yet it appears to be a mantra on HBT to chuck the bitter Curacao peel and just zest a grocery-store orange. That's dumb, mainly because there's no real basis for it.
* It's the same thing with canned beer. "Everyone knows" that canned beer tastes like metal, and that bottled beer tastes better, right? Trouble is it's horsepuckey. Blind test after blind test confirms that you can't tell the difference.