Auer joins the BMW manufacturer line-up just a day after the marque announced it was moving Bruno Spengler from its DTM programme after 15 years in favour of a move into the IMSA WeatherTech SportsCar Championship.
It marks a return to the DTM for Auer, who left the series when Mercedes chose to quit the DTM in favour of a move into Formula E ahead of the 2019 season.
Auer then moved into Super Formula with Red Bull backing, but he only managed to secure one podium finish before he mutually parted ways with Red Bull and he was also present at several DTM rounds this year in a punditry role.
"I am really excited about returning to the DTM with BMW," said Auer. "During my career, I have been in contact with BMW Motorsport on several occasions, but it all came together this time.
"I am counting down the days until I get into the car for the first time. I took a big step forward personally last year in Japan.
"The key now will be to adapt quickly to the DTM again. However, I am not worried about that."
BMW motorsport boss Jens Marquardt added: "Welcome back to the DTM, Lucas Auer.
"I am obviously particularly happy, not only to be able to welcome him back to the DTM but also to welcome him into the BMW family.
"In his 73 DTM races so far, Lucas has emphatically shown what he is capable of and, with four wins and ten podiums, has proven that he can mix it at the very front of the field.
"We believe that he will fit in very well with us, not only because of his huge potential as a driver, but also his friendly nature."
The Auer announcement also included confirmation that 2019 race-winners Marco Wittmann and Philipp Eng, Timo Glock and 2019 rookie Sheldon van der Linde will remain with the manufacturer in '20.
The news comes after BMW's difficult 2019 season was compromised by reliability problems influenced by the new-for-2019 Class One engines, requiring it to add significant weight to an M4 DTM that was already difficult to set-up.
Marquardt then revealed late on in the 2019 season that the manufacturer would undergo a review of its structure, teams and drivers.
While Spengler's exit left room for Auer's signing, there is still at least one space left in BMW's factory line-up with Eriksson's exit.
Eriksson took the brunt of BMW's reliability problems in 2019 and managed just two podiums during 2019, failing to score points in nine of 18 races.
Ex-Williams Formula 1 driver Robert Kubica and BMW factory driver Nick Yelloly both tested an M4 DTM in the rookies' test at Jerez last week. Kubica is known to be targeting a DTM campaign alongside F1 simulator work.