"In character" (often abbreviated IC) means a character behaving in accordance with their established characterization. Canon characters are only in-character if their behavior jives with what is known about their personality in canon; this is seen in the canonical work itself and in goodfic.
Any deviation from a canon character's established characterization renders them out of character, or OOC. The extent to which a canonical is IC or OOC can be determined with a Canon Analysis Device or a litmus strip.
"IC" is not to be confused with the other IC, a rarely used acronym for the Department of Implausible Crossovers.