Dill has quite an imagination, and that is one of the reasons for his outlandish lies and stories told in To Kill a Mockingbird. Sadly, his family life is not as satisfying as Jem's and Scout's relationship with Atticus, and Dill overcompensates with tall tales about his own mother and father. Each story he tells about his father seems to contradict the one before, and the reader must eventually ask the question if he even has a father. What we do learn is that his father is taller than Atticus, richer than Atticus and more distinguished-looking than Atticus. However, Jem and Scout never really believe Dill's stories. Later, Dill tells of a falling out with his new father, and he runs away from the tortures that he has had to endure.
Look at mankind in general for your answer. Most people lie when the truth is not very attractive. Another reason for lying is to manipulate or get one's way. Out of the mouth of a young child like Dill, another reason to lie is simple creativity. Dill's purposes were probably mixed.
Dill's family situation is really untold in the book, but the book leads us to infer or believe that his situation was at least unstable. He was shifted around among relatives. Although Aunt Rachel probably had moments of true nurturing for Dill, what we see most in the text is her frustration with Dill. Dill's instability likely resulted in many misbehaviors because his parental structure was regularly changing.
I think Dill could get away with lies to the kids at least in the beginning because they didn't know his background. He chose good interesting things to lie about, and most kids want to impress other kids.