Auditory phantom perception, exemplified by tinnitus, is characterized by a perceptual experience without external stimuli. This study utilized two auditory illusions, the Zwicker Tone (ZT) and Conditioned Hallucinations (CH), as proxies to investigate the neural correlates of bottom-up and top-down mechanisms underlying phantom auditory perception. Using a within-subject design, ZT, driven by temporary sensory deficits, and CH, influenced by multisensory expectations, were examined in a sample of healthy participants. Electrophysiological measures revealed distinct time–frequency patterns, with increased theta activity in central regions during ZT perception but decreased parietal theta power during CH perception. Key regions in the ZT network, including the medial prefrontal cortex, lateral orbitofrontal cortex, and ventral posterior cingulate cortex, suggested the involvement of the default mode network and predictive processing in compensating for sensory deficits. In contrast, CH perception implicated the parahippocampus, entorhinal cortex, and inferior temporal gyrus in modulating multisensory associations and cognitive expectations. Taken together, this study revealed the neural mechanism of two auditory illusions, which enhances understanding of tinnitus mechanism. The results also highlight potential neural targets for neuromodulation interventions addressing both sensory and cognitive components of chronic phantom perception.