On 19 March 1921, Tom Barry's 100-strong West Cork IRA unit fought an action against 1,200 British troops – the Crossbarry Ambush. Barry's men narrowly avoided being trapped by converging British columns and inflicted between ten and thirty killed on the British side.
A general election for the Parliament of Southern Ireland was held on 13 May. Sinn Féin won 124 of the new parliament's 128 seats unopposed, but its elected members refused to take their seats.
The biggest single loss for the IRA, however, came in Dublin. On 25 May 1921, several hundred IRA men from the Dublin Brigade occupied and burned the Custom House (the center of local government in Ireland) in Dublin city center. Symbolically, this was intended to show that British rule in Ireland was untenable. However, from a military point of view, it was a heavy defeat in which five IRA men were killed and over eighty captured.
On 6 June 1921, the British made their first conciliatory gesture, calling off the policy of house burnings as reprisals. On the other side, IRA leaders and in particular Michael Collins, felt that the IRA as it was then organized could not continue indefinitely. It had been hard-pressed by the deployment of more regular British soldiers to Ireland and by the lack of arms and ammunition.
On 24 June 1921, the British Coalition Government's Cabinet decided to propose talks with the leader of Sinn Féin. Coalition Liberals and Unionists agreed that an offer to negotiate would strengthen the Government's position if Sinn Féin refused.