Item response theory (IRT) and related latent variable models represent modern psychometric theory, the successor to classical test theory in psychological assessment. Although IRT has become prevalent in the measurement of ability and achievement, its contributions to clinical domains have been less extensive. Applications of IRT to clinical assessment are reviewed to appraise its current and potential value. Benefits of IRT include comprehensive analyses and reduction of measurement error, creation of computer adaptive tests, meaningful scaling of latent variables, objective calibration and equating, evaluation of test and item bias, greater accuracy in the assessment of change due to therapeutic intervention, and evaluation of model and person fit. The theory may soon reinvent the manner in which tests are selected, developed, and scored. Although challenges remain to the widespread implementation of IRT, its application to clinical assessment holds great promise. Recommendations for research, test development, and clinical practice are provided.