A tall tale is a story in which characters, plots, settings, or other elements are exaggerated to an impossible degree, nearly always for humorous effect. Tall tales are often told as part of a folkloric or oral tradition, and usually related as if they were entirely factual.
In America, we often think of tall tales as stories for children, because many of our most well-known tall tales have become common literary elements of kids' lit. Paul Bunyan and his giant blue ox, Babe, Pecos Bill, Febold Feboldson, Annie Christmas, Joe Magarac, and Alfred Bulltop Stormalong are all examples of fully fictional tall tales, but there have also been a lot of real people whose lives have been exaggerated so extravagantly that they became their own tall tales -- Johnny Appleseed, Daniel Boone, Davy Crockett, John Henry, Calamity Jane, Casey Jones, Mike Fink, and Jim Bowie were all real people, but you can still find wildly imaginative fictional stories about their exploits in children's books.
Another popular style of tall tale focuses on strange animals that could be found in the West or in wilderness areas. These include jackalopes, sidehill gougers, wampus cats, fur-bearing trout, hoop snakes, snallygasters, squonks, hidebehinds, cactus cats, and many more. Sometimes, these cross over into cryptozoology, with the various kinds of Bigfoot, Sasquatch, the Jersey Devil, and lake monsters like the Loch Ness Monster.
Still, tall tales aren't only for kids. There have been tall tale heroes created through literature, history, entertainment, and even advertising. Chuck Norris facts? Those are tall tales. The Adventures of Baron Munchausen? Tall tales. Robin Hood? Tall tales. Bill Brasky? Tall tales. The Most Interesting Man in the World? Tall tales. Adults like telling tall tales, too -- many chapters of Toastmasters International, a worldwide club that promotes public speaking, have annual tall tales contests. Tall tales are popular topics for professional storytellers as well. And many states host a yearly tall tales contest for the biggest bullshitters in the region.
(Obviously, tall tales aren't exclusive to the United States. Lots of tall tales from other parts of the world are a great deal older than the ones in America; many of them probably ended up getting converted into legends, mythology, or religion. But I live in this country, and any worthwhile info I'd offer about tall tales in other countries or cultures would be C&P crap from Wikipedia. But you should add your own to E2.)