BACKGROUND: Caudate functional abnormalities have been identified as one critical neural substrate underlying sensory gating impairments that lead to auditory phantom hallucinations in both patients with schizophrenia (SZ) and tinnitus, characterized by the perception of internally generated sounds in the absence of external environmental auditory stimuli. In this study, we tested the hypothesis as to whether functional connectivity abnormalities in distinct caudate subdivisions implicated in sensory gating and auditory phantom percepts in tinnitus, which are currently being localized for neuromodulation targeting using deep brain stimulation techniques, would be associated with auditory phantom hallucination severity in SZ. METHODS: Twenty five SZ and twenty eight demographically-matched healthy control (HC) participants, completed this fMRI resting-state study and clinical assessments. RESULTS: Between-group seed-to-voxel analyses revealed only one region, the caudate anterior head, which showed reduced functional connectivity with the thalamus that survived whole-brain multiple comparison corrections. Importantly, connectivity between the caudate anterior head with thalamus negatively correlated with hallucination severity. CONCLUSIONS: In the present study, we deliver the first evidence of caudate subdivision specificity for the neural pathophysiology underlying hallucinations in schizophrenia within a sensory gating framework that has been developed for auditory phantoms in patients with tinnitus. Our findings provide transdiagnostic convergent evidence for the role of the caudate in the gating of auditory phantom hallucinations, observed across patients with SZ and tinnitus by specifying the anterior caudate division is key to mediation of hallucinations, and creating a path towards personalized treatment approaches to arrest auditory phantom hallucinations from reaching perceptual awareness.