Differential Item Functioning (DIF) occurs when examinees with the same ability have different probabilities of endorsing an item. Conventional DIF detection methods (e.g., the Mantel-Hansel test) can be used to detect DIF only across observed groups, such as gender or ethnicity. However, research has found that DIF is not typically fully explained by an observed variable (e.g., Cohen & Bolt, 2005). True source of DIF may be unobserved, including variables such as personality, response patterns, or unmeasured background variables. The Factor Mixture Model (FMM) is designed to detect unobserved sources of heterogeneity in factor structures, and an FMM with binary outcomes has recently been used for assessing DIF (DeMars & Lau, 2011; Jackman, 2010). However, FMMs with binary outcomes for detecting DIF have not been thoroughly explored to investigate both types of between-class latent DIF (LDIF) and class-specific observed DIF (ODIF). The present simulation study was designed to investigate whether models correctly specified in terms of LDIF and/or ODIF influence the performance of model fit indices (AIC, BIC, aBIC, and CAIC) and entropy, as compared to models incorrectly specified in terms of either LDIF or ODIF. In addition, the present study examined the recovery of item difficulty parameters and investigated the proportion of replications in which items were correctly or incorrectly identified as displaying DIF, by manipulating DIF effect size and latent class probability. For each simulation condition, two latent classes of 27 item responses were generated to fit a one parameter logistic model with items’ difficulties generated to exhibit DIF across the classes and/or the observed groups. Results showed that FMMs with binary outcomes performed well in terms of fit indices, entropy, DIF detection, and recovery of large DIF effects. When class probabilities were unequal with small DIF effects, performance decreased for fit indices, power, and the recovery of DIF effects compared to equal class probability conditions. Inflated Type I errors were found for invariant DIF items across simulation conditions. When data were generated to fit a model having ODIF but estimated LDIF, specifying LDIF in the model fully captured ODIF effects when DIF effect sizes were large. / text