if they were able to associate with some sort of external reality will that prevent hallucination or just being wrong. Humans hallucinate and humans are wrong, perhaps being able to have intelligence without these qualities is the impossibility.

It's certainly possible that computers will suffer from all the same foibles that humans do, but we have a lot of evolutionary baggage that computers don't, so I don't see any fundamental reason why AGIs could not transcend those limitations. The only way to know is to do the experiment.