Libel is the crime of publishing false information about another person, group, company, etc. In other words, libel is committed when one person publicly (and falsely) accuses someone of a crime or unfairly harms their reputation.
The children make a snowman in the image of Mr. Avery because Mr. Avery said that the snowfall was caused by children disobeying their parents. Atticus notices the similarity of the snowman to Mr. Avery. Although he is kidding that Jem has committed libel, Atticus does ask Jem to change the snowman a bit to eliminate the chance that Mr. Avery will be offended. The libel comment is sarcastic. Atticus knows a snowman looking like Mr. Avery will not harm his (Mr. Avery's) reputation. Still, Atticus asks the kids to make the likeness less obvious.
In chapter 8 of To Kill a Mockingbird, Maycomb is actually having a real winter. This is a rare occurrence for the citizens of the town. They even have the first snowfall in years. Mr. Dick Avery is a neighbor of the Finch's. Scout talks about how she has seen him urinating from his porch. She thinks this is probably the most impressive thing he has done in his life. He tells Jem and Scout that the dramatic change in the weather is brought on by misbehaving children. Jem and Scout don't like him very much.
Jem and Scout gather all the snow they can and have enough to make a snowman. They make the snowman to resemble Mr. Avery. They, of course, think it is very funny. Atticus on the other hand, is not at all thrilled. He tells Jem he has perpetrated a near libel. A libel is a legal term meaning a published false statement that is damaging to a person's reputation. Atticus, is of course joking with Jem, but he asks the children to make the snowman a little less like Mr. Avery.
What is interesting in this exchange is that the term libel will be very real later on in the novel. When the court case begins, we see the true definition of libel. Although the term is used in jest with Jem, it will become a nightmare to Tom.
I like turtles and fat women