Small child involved in fibs? That’s understatement (7)
I believe the answer is:
litotes
'understatement' is the definition.
(thesaurus)
'small child involved in fibs?' is the wordplay.
'small child' becomes 'tot' (I've seen this before).
'involved in' means one lot of letters goes inside another.
'fibs?' becomes 'lies' (fib is a kind of lie).
'tot' put into 'lies' is 'LITOTES'.
'that's' acts as a link.
(Other definitions for litotes that I've seen before include "Rhetorical understatement - toilets (anag)" , "No little pain, say" , "Ironic figure of speech" , "no overstatement" , "Town of N. Norway" .)