Tane Tane Shrooms are found in Tane Tane Island, near the shore where the party first lands. With the team at an incredibly low state of being, they have no choice but to eat the shrooms in order to regain energy.
However, this comes at a price. Tane Tane Shrooms prey on the weakness in one's heart, and exploits it. As such, Lucas and Kumatora are affected most. Boney is immune to the hallucinations, as seen when he refuses to enter the Hot Spring, which is actually a pond of trash. The monsters on the island take the form of first a character, such as Flint, Salsa or Wess as an example. Next, once in battle, they take the form of an Eerie Smile. After taking enough damage, they revert back to their original form, the true monsters on the island.
The effect is cured by a smack to the head with a board. Mixolydia uses it on the characters, including Boney.
After the Needle is pulled, the shrooms are no longer found on the island, nor anywhere else.