Foreign Minister Julie Bishop says some 150 Australians are fighting with rebel groups in the Middle East.
She says the government is concerned about the risks these fighters pose if they return to Australia.
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"Of course we are deeply concerned about Australians, including dual nationals who are supporting or working, or actually fighting with this extremist group," she told the ABC.
"These are brutal people...the executions, the killings - and they're boasting of it on social media makes this a particularly virulent form of terrorism.
"We are concerned that Australians are working with them, becoming radicalised, learning the terrorist trade and if they come back to Australia of course it poses a security threat and we're doing what we can to identify them."
Ms Bishop has told ABC radio she has cancelled the passports of some of these fighters.
The foreign minister added that Australia will provide $5 million dollars in humanitarian assistance in Iraq.
Attorney-General George Brandis said on Wednesday the government had long been concerned that Australian extremists were fighting in Syria and believe some may now have crossed the border and are fighting in Iraq.
News Corp reports convicted terrorist Khaled Sharrouf is thought to be among the fighters associated with the Islamic State of Iraq and the Levant (ISIL), also known as ISIS.
Senator Brandis was unwilling to discuss details, other than to state it was believed Sharrouf had travelled to Syria.
However, Sharrouf's social media profile showed him in military fatigues waving the ISIL flag, while counter-terrorism sources had confirmed the picture was of him and that he was believed to be in Iraq, the report said.
Fairfax media reports Australians who left to fight against the Syrian regime of Bashar al-Assad have now joined forces with ISIL and have crossed the border into neighbouring Iraq.
The report said at least several Australians had entered Iraq and had seen fighting in the north of the country.
Firas Naji at the Arab Council of Australia has warned people to consider if joining the battle is the best way to help their fellow countrymen.
"It's not really good for us to be involved in violence overseas, so I don't recommend it. For those people who feel strong about the issue and really want to contribute and make a difference, there's a huge humanitarian crisis unfolding in Iraq now, and definitely there's a lot of opportunity for people to be involved in this and help."
Full interview with Firas Naji
