The huge tax bill would wipe out the cash that the former 'Big Brother' star left to Bobby Jack, nine, and Freddie, eight after her death from cervical cancer in 2009.
Goody's mother Jackiey Budden, 55, said the family was "livid" over the Inland Revenue's "heartless" demand and would seek legal advice, the Daily Mirror reported.
"It is devastating. It was her dying wish that the two boys had the life she never had and now they might be left with nothing," Budden said.
Inland Revenue originally demanded 566,000 pounds but now wants 1,035,902 pounds.
They ruled that the expenses and losses on Goody's beauty salon in Harlow, Essex, and costs including her wedding to Jack Tweed before she died did not qualify for tax relief.
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