An IPS file is a standard type of file containing a patch
for a ROM
file. You apply the patch with an IPS patcher, and the rom is changed.
This is usually done because this way you can easily legally distribute modifications to a game without having to actually distribute the modified game, which would involve copying and distributing copyrighted material, and so you'd get the smack down from some corporation even if you took steps to ensure the only people downloading your edited ROM owned the game legally already.
IPS files are usually translations, into other languages, or cheats. I have seen some really weird ones though. My favorite was one that ripped some of the graphics out of Super Mario Brothers and replaced them with graphics from Legend of Zelda.. so you had link running around, collecting rupees, jumping on skeletons, grabbing life flasks from question mark boxes and becoming Big Link. It was cool.