We present a method to simulate two-dimensional scattering by dielectric objects embedded in a dielectric layered medium with transverse magnetic polarization through a domain integral equation formulation. A mixed spatial-spectral discretization is employed with both a spatial and a spectral representation along the direction of the layer interfaces. In the spectral domain, a discretization on a path through the complex plane is used on which the Green function is well behaved. To calculate the field-material interaction in the spatial domain, an auxiliary field is employed similar to the Li factorization rules. Numerical results show that this auxiliary-field formulation significantly improves accuracy, compared to a formulation that directly employs the electric field.