“Shots fired” can also be a comedic way for an onlooker to remark that a person insulted someone. For example, if you tell your friend that their shirt looks like garbage, another friend could say, “Shots fired”.

It's literal, not an expression - - something used by the police, or when calling the police, at least in my experience. "Shots fired" means gunshots have occurred.

Both are true. Police will call "shots fired" on their radio to alert any other police arriving at that place, that the situation is dangerous. However, this is imitated to be funny. If a person says something mean or offensive to another person, then it would usually be a third person present, who might joke, "Whoa. Shots fired." They are joking about the fact that the situation just got hostile, and it is usually a hint to the people involved that they are being hostile and should stop.

It has the figurative use described by Carlo, but I wouldn’t say that it is always used in a comedic way, though it often would be. It could just mean the first step in a conflict that is going to continue. Those two really hate each other. She hired a divorce lawyer last week. Shot fired. (This is going to be a nasty divorce)