The main source for the story appears to be a book published in 1898, Land of Legendary Lore: sketches of romance and reality on the eastern shore of the Chesapeake, by Prentiss Ingraham.
According to Ingraham:
It was the ideal spot for spooks to haunt, while to enhance the dismalness of the old abode, it became the dwelling place of an old woman known as "Katie Coburn, the Witch." This "witch," the last of her kind known in Talbot, was old, deformed, hideous, and was guilty of diabolical ways and impish incantations to make herself feared. That she was dreaded by all, especially the children and negroes, there was no doubt, for the former were kept out of mischief by being threatened with her, and the latter felt that the sight of her was a hoodoo upon them. The negroes accordingly gave Witch Katie a very wide margin of room when they met her, and wore charms to counteract her spells, the "left hind foot of a rabbit, killed at the dark of the moou," doubtless being in great demand after a meeting with the "Witch of Plaindealing."
Not far from Plaindealing there lived a farmer whose cows pastured near the old burying-ground. One afternoon the boy whose duty it was to drive the cows home had to go near the lonely spot, and beheld to his amazement a stranger there ;—a man tall, stately, in the ancient garb like that worn by those whose portraits were in the deserted mansion. The man spoke to the boy, but the latter tied for home, told his story, and it was not believed. Again he saw the same man, and again, until at last he spoke to him, and for response saw him walk to a certain spot in the burying-ground and point downward, at the same time stamping his foot. This same performance was gone through with several evenings after, between the boy and the silent spectre in quaint old time costume.
On one occasion the spectre led the boy, now no longer afraid of him, into the old home and pointed to a portrait on the wall. The boy saw that the "ghost" was strangely like the portrait, dress and all. Then he was led back to the grave yard and the spectre pointed downward and stamped his foot, as before. As it was growing dark, and the cows had gone on ahead, the boy suddenly decided to go home, and he lost no time in doing so, his parents again laughing at his story. But then came the rumor that "Witch Katie" had not only disappeared from Plaindealing, but also from the country. The boy had not seen her since the coming of the quaint man of the grave-yard.
A similar version of the story is told in an 1876 edition of McBride's Magazine.
According to McBride's:
It [Plain Dealing] was the very place for a first-class ghost story, and its fitness was heightened by the residence on the premises of Katie Coburn, the last witch of Talbot. This poor old creature, lonely, deformed, repulsively ugly and wretchedly poor, was a terror to negroes and children far and near, who had marvelous tales of her impish ways and diabolical cantrips.It seems reasonable to think that at least part of the legend is true. A deformed woman may have lived in the area and some, especially the young and uneducated, may have believed that she was a witch. Whether or not she actually was or really wanted others to think that is anyone's guess. But as I argued in Justice At Salem: Reexamining The Witch Trials, there could be certain advantages to having other people think that you were a witch. Others might think twice about harming or taking advantage of you because they fear your supernatural ability to seek revenge. For a poor defenseless woman who no power in her society, this could have been her only means of self-defense against the the unthinking rabble.