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.

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. 

Jem and Scout had never seen snow before, so when she awoke one morning and saw that it was white outside, she believed that "The world's endin'..." School was canceled and the kids decided they would build their first snowman. Atticus warned them that there probably wouldn't be enough snow to construct a proper snowman, but Jem had an idea of his own. He would use the snow from Miss Maudie's yard as well. When he discovered that there was still not enough snow for a life-size figure, he used mud for the inside and kept their precious snow for the outer layer. When Atticus got his first glimpse of the character, however, he

... squinted at the snowman a while. He grinned, then laughed.  (Chapter 8)

Atticus saw that the snowman too closely resembled their neighbor, Dick Avery, with a fat belly and "cross" stare. After explaining to Jem that he had "perpetrated a near libel here in the front yard," Atticus suggested that Jem "disguise this fellow." Atticus simply didn't want Mr. Avery to be offended by the snowman, since the man had already blamed the children's bad behavior on the unseasonable cold weather. The white on the outside, black on the inside snowman would symbolically represent the racial makeup of the town and how the differences between blacks and whites were only skin deep.

In Harper Lee's To Kill a Mockingbird, Atticus' comment comes in Chapter Eight. This is the first time Scout has ever seen snow, and she and Jem make a snowman, with a mixture of some snow and a lot of mud. The kids are very anxious that Atticus see their creation when he comes home from work. Atticus says:

Son, I can't tell what you're going to be—an engineer, a lawyer, or a portrait painter. You've perpetuated a near libel here in the front yard. We've got to disguise this fellow.

To comprehend the quote's significance, we need to know the meaning of the words "perpetuate" and "libel." "Perpetuate" is used as a verb here; it means...

...to cause to last indefinitely.

The other word of note is "libel" which means...

...a written or oral defamatory statement or representation that conveys an unjustly unfavorable impression.

What Atticus has told Jem with his statement is that his snowman looks very much like Mr. Avery, something the kids had already noticed, as Scout pointed out...

Mr. Avery's sort of shaped like a snowman, ain't he?

Atticus' notion that the snowman looks so much like Mr. Avery has already been expressed, again by Scout:

"It's lovely, Jem," I said, "Looks almost like he'd talk to you."

Looking like Mr. Avery might not be such a bad thing, but Jem uses small pieces of wood for facial features, so that...

Jem succeeded in making  Mr. Avery look cross.

And it may be for this specific reason that Atticus suggests that they change the snowman's appearance so that Mr. Avery is not offended. When Atticus states that Jem has "perpetuated a near libel," he is in a sense congratulating his son on the likeness of the man that Jem has captured in the snow-and-mud figure. It looks very much like Mr. Avery—but it is unflattering to him—and Mr. Avery might feel the caricature creates an "unfavorable impression." In the broadest sense, committing libel, or insulting someone's reputation beyond repair, is a criminal offense.

Basically, Jem shows a remarkable talent for creating a figure that looks very much like Mr. Avery, who might not appreciate the snowman's likeness to him.

Jem and Scout have never seen snow before, so when it finally snows in Maycomb County, they want to make a snowman. They don’t have enough snow, so they use snow from Miss Maudie’s yard. When their father Atticus sees the snowman, he calls it a “near libel,” because it closely resembles their neighbor Mr. Avery, and not in a flattering way: the snowman has a rounded stomach like Mr. Avery, and the facial features made from wood succeed in making the snowman look quite angry. Jem’s creation seems to be revenge for earlier in the day when Mr. Avery blamed the children for the bad weather:

It’s bad children like you makes the seasons change.

Atticus suggests that Jem modify the snowman’s appearance so that it won’t offend Mr. Avery, and so they add Miss Maudie’s sun hat and hedge clippers to the snowman so it looks less like Mr. Avery and more like, as Miss Maudie jokes to Atticus, a “hermaphrodite.”

The humor of this scene is quickly cut short. That night, Miss Maudie’s house is on fire and all the neighbors help to remove furniture from her house, including Mr. Avery who saves her mattress and almost gets trapped in the fire as a result. Mr. Avery did what he could to help Miss Maudie, unlike the snowman, which has become nothing more than a sunhat and hedge clippers.

This is a tough question if you don't understand what the word "libel" means, which you rarely hear in everyday speech.  On definition of libel that applies here, from the Princeton web dictionary, is

"a false and malicious publication printed for the purpose of defaming a living person."

So, in other words, something made to deliberately make fun of someone.

That being said, the passages that you are looking for can be found in chapter eight, where, for the first time in a long time, it actually snowed in Maycomb.  Jem and Scout, excited, decide to make a snowman.  They have a hard time of it--there isn't much snow, so it ends up looking more like a "mud man" than anything else.  Well, Jem decides that  "Mr. Avery's sort of shaped like a snow man, ain't he?" and then fashions the snowman to look almost exactly like him.  Mr. Avery is an older, rather surly man who tends to be drunk quite frequently, and make grumpy and frightening comments to children to make them feel bad for being rowdy.  Jem and Scout even witnessed him peeing off his front porch for quite a long time (and distance) one evening after too much drinking.  So, Jem and Scout "succeeded in making Mr. Avery look cross" as a snowman. It was their way to kind-of make fun of Mr. Avery. When Atticus came home, he noticed the resemeblance immediatly, and said, "You've perpetraed a near libel in the front yard," because he looked so much like Mr. Avery that it is obviously noticable.  So, they grabbed one of Miss Maudie's hats and try to disguise the snowman's resemblence to the cantankerous Mr. Avery.

I hope those thoughts help; good luck!

Excited by their first sight of snow, Jem and Scout busily begin building their first snowman in the front yard. They soon recognized that there wouldn't be enough snow for a full-sized snowman, so Jem came up with a novel idea: He would use the hard, wet mud for the inside, and use the meager amount of snow on the outside. At first, the snowman looked like Miss "Stephanie Crawford with her hands on her hips." With "his eyes twinkling," Jem decided to alter its appearance to look like their neighbor, Mr. Avery, since he was "sort of shaped like a snowman." Atticus loved their creation, and he

... squinted at the snowman a while. He grinned, then laughed... You've perpetrated a near libel here in the front yard. We've got to disguise this fellow... You can't go around making caricatures of the neighbors."

It was Atticus's way of explaining the problem in a legal sense. The snowman looked so much like Mr. Avery that he knew others would recognize it--as well as Mr. Avery--and be amused, at the expense of their neighbor. So, Jem added Miss Maudie's sunhat and a pair of hedge-clippers, and soon the Mr. Avery snowman was recognizable. When Miss Maudie saw it, she unknowingly gave it a new name: The Morphodite snowman.

In chapter 8, Jem and Scout create a snowman out of snow and earth, since there isn't enough snow to create a completely white snowman. At first Scout says it looks like a black man, but then Jem applies wood, sticks, and patches of snow to make it look like Mr. Avery. When Atticus comes home to see the snowman, he is amazed at how perfectly Jem made it look like Mr. Avery. This is when Atticus makes his ironic comment, as follows:

"Son, I can't tell what you're going to be—an engineer, a lawyer, or a portrait painter. You've perpetrated a near libel here in the front yard. We've got to disguise this fellow" (67).

Two key words need to be understood in this instance: Libel means to defame someone through writing or pictures and then follow through with publishing it. Next, irony is when the opposite of what is expected actually happens. When Atticus says "near libel," it means that the snowman can't stay in its original form because people will all know it is Mr. Avery whom Jem is imitating.

The snowman could look as if it is urinating, because the kids caught Mr. Avery doing the exact same thing off his porch one summer night. If that's the case, then it would certainly be a defamatory snowman, identified by all the neighbors, as well as greatly unexpected by Atticus. If that is correct, this explains why Jem gets an apron to cover up the lower half of the snowman's body and why he's asked to change it.

Atticus's laughter and comment praise Jem, but also show situational irony because he didn't expect his son to be able to create something that so accurately depicts a neighbor. This can also be termed verbal irony when he says "near libel," because the connection that he makes to a criminal act is unexpected. Furthermore, if the snowman is not depicting Mr. Avery urinating, it's ironic that Atticus would use such a strong term with criminal connotations for a little snowman, which is not criminal in any way. But the fact that Atticus is a lawyer, and Jem's dad, makes the whole scene hilarious, too.

When Atticus praises Jem by telling her she has "perpetrated a near libel," his praise is ironic because libel is a criminal act.  To commit libel is to publish a statement intended to defame the character of another person (or group of people).  Aside from its criminal aspect, libel is generally not an act for which someone would receive praise, because it carries with it a strongly negative association.  So, for Jem to receive a positive response for what is certainly a negative action amplifies the irony of Atticus's statement.