IRC (Internet Relay Chat) was created by Jarkko Oikarinen (WiZ) in August 1988. It was first written to replace a program called MUT (MultiUser Talk) on a BBS called OuluBox in Finland. Jarkko Oikarinen found inspiration in Bitnet Relay Chat which operated on the Bitnet network. Humorously enough, the famous "idiot user" B1FF, who was allegedly a BITNET user, was actually a well known IRC operator.
IRC has a decentralized network of servers that can be accessed by special client programs. The protocol for IRC is open, and there are many client (and server) implementations.
The IRC protocol is a plaintext protocol, which means that it is fully possible to use IRC via telnet, although quite inconvenient. It also means that it is possible to intercept and read the communication between client and server, and even hijack and inject the connection. This is unfortunate, as there has been quite a lot of takeover wars on various IRC Networks.
Today the largest IRC Networks are EFNet, Undernet, IRCNet and Dalnet. They run various implementations of serversoftware, but the basic protocol is the same, and all networks can be accessed by the same IRC Clients.
There are also many programs which are clients, called "bots", short for "robot". The first 'bot was written by GregLindahl and provided moderation for the game of Wumpus, but most modern bots either are used to exercise operator privs (controlling channels), to annoy other users (perhaps by spamming them with lots of traffic), or to server as permanent points of contact for information exchange (an answering machine, file transfer, etc.)
IRC served as an early laboratory for many kinds of Internet attacks, such as using fake ICMP unreachable messages to break TCP connections.
Popular IRC clients:
Wikipedia has an IRC channel called #wikipedia on irc.openprojects.net.