The viewing or reading audience notes a plot hole when something happens during the story that seems highly unlikely, or would be impossible to imitate in real life. If a bank robber's car is being chased by five or six police cruisers, and the bank robber successfully evades capture simply by making a left turn down a dark alley, this is seen as a plot hole.
It is usually seen as a mark of good writing or directing when a storyteller presents a story in such a way that the audience does not notice plot holes, or willingly chooses to overlook them in favor of enjoying the story.
Example: Bill is killed in a fire, but shows up later. How did Bill return from the dead?
See also: deus ex machina, suspension of disbelief