Foreign Minister Julie Bishop insists Australia must continue to help the Iraqi government "win the peace" otherwise there's a risk of armed groups morphing into IS 2.0.
Ms Bishop has travelled to Kuwait, in the Middle East for a ministerial meeting on countering IS and an international conference on rebuilding Iraq.
Iraq's prime minister declared victory over the militant group late last year.
But there were still ISfighters in contested or ungoverned regions in Syria, posing a threat.
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Ms Bishop believes some IS members are seeking to hide among the general population in Iraq and return to the tactics of insurgency.
"To break the cycle of violence, it is vital that the Iraqi government wins the peace as effectively as it has won the war," Ms Bishop said in a speech.
"Failure to do so runs the very real risk that they will turn to armed groups that could morph into ISIL 2.0."
Australia last year stumped up a $100 million stabilisation package for Iraq.
"We must focus on the conditions that led to the rise and spread of IS and extremist ideologies, and work to prevent them gaining the momentum that brought this coalition together in 2014," Ms Bishop said.
Meanwhile, Defence Minister Marise Payne has travelled to Italy to meet her ministerial counterparts to discuss efforts to counter IS.
She'll also have talks with defence officials in Brussels.
Australia last month brought home its six Super Hornet fighter jets after ceasing air strike operations against IS in Iraq and Syria.
Australian and New Zealand soldiers have trained more than 30,000 Iraqi troops in the fight against IS militants since 2015.
