Understatement in stories about small child (7)
I believe the answer is:
litotes
'understatement' is the definition.
(thesaurus)
'stories about small child' is the wordplay.
'stories' becomes 'lies' (I've seen this before).
'about' means one lot of letters goes inside another.
'small child' becomes 'tot' (I've seen this before).
'lies' going around 'tot' is 'LITOTES'.
'in' is the link.
(Other definitions for litotes that I've seen before include "no overstatement" , "Ironic understatement, like shan't be sorry" , "No exaggeration" , "No small task, for example" , "Town of N. Norway" .)