Originally posted by Cooperal:

You can't make truly underground structures. Your best bet is to make the illusion by tunnelling into a cluster of large boulders or carving out a basement space before you build a structure over it.

Thatch roofs can look passably natural if used to cover the tops of smaller valleys and crevices. It helps if it can blend in among actual natural decorations.

This! I spent a good bit of time in the Mountains on my last playthru to find a nice cluster of boulders. I found 7 at the top of a gently sloping hill (steep slopes suck for tunneling btw) and was able to create a 'ring' type dungeon with my tower/base in the middle where the rocks met up. It was a great base, just wish I could actually torture greys and fulings in there :)

Best is to dig town as far as you can next to the 'lowest rock and then did under it. Just be careful as you approach the walls on the sides or backside of the boulder as you can pickaxe a big chunk and now you have a skylight in your dungeon. Haha, good luck!