diff --git a/pkgs/typed-racket-pkgs/typed-racket-lib/typed-racket/typecheck/tc-let-unit.rkt b/pkgs/typed-racket-pkgs/typed-racket-lib/typed-racket/typecheck/tc-let-unit.rkt
index 61f6500dc0..dcbcbcbdec 100644
--- a/pkgs/typed-racket-pkgs/typed-racket-lib/typed-racket/typecheck/tc-let-unit.rkt
+++ b/pkgs/typed-racket-pkgs/typed-racket-lib/typed-racket/typecheck/tc-let-unit.rkt
@@ -9,8 +9,10 @@
          (rep type-rep filter-rep)
          syntax/free-vars
          (typecheck signatures tc-metafunctions tc-subst internal-forms)
+         (utils tarjan)
          racket/match (contract-req)
          syntax/parse syntax/stx
+         syntax/id-table
          ;; For internal type forms
          (for-template (only-in racket/base define-values)))
 
@@ -188,27 +190,43 @@
 
 ;; get-non-recursive-clauses : (Listof lr-clause) (Listof Identifier) ->
 ;;                             (Listof lr-clause) (Listof )
-;; Find an approximation of letrec clauses that do not create variable cycles
-;;
-;; Note: this is currently approximate, but using Tarjan's algorithm would yield
-;;       an optimal ordering for checking these clauses.
+;; Find letrec-values clauses that do not create variable cycles
 (define (get-non-recursive-clauses clauses flat-names)
-  (define-values (non-recursive remaining _ignore)
-    (for/fold ([non-recursive '()]
-               [remaining '()]
-               [flat-names flat-names])
-              ([clause clauses])
-      (match-define (lr-clause names expr _) clause)
-      (cond [(not (ormap (lambda (n) (member n flat-names bound-identifier=?))
-                         (free-vars expr)))
-             (values (cons clause non-recursive)
-                     remaining
-                     (remove* names flat-names bound-identifier=?))]
-            [else
-             (values non-recursive
-                     (cons clause remaining)
-                     flat-names)])))
-  (values (reverse non-recursive) remaining))
+
+  ;; Set up vertices for Tarjan's algorithm, where each letrec-values
+  ;; clause is a vertex but mapped in the table for each of the clause names
+  (define vertices (make-bound-id-table))
+  (for ([clause clauses])
+    (match-define (lr-clause names expr _) clause)
+    (define relevant-free-vars
+      (for/list ([var (in-list (free-vars expr))]
+                 #:when (member var flat-names bound-identifier=?))
+        var))
+    (define vertex (make-vertex clause relevant-free-vars))
+    (for ([name (in-list names)])
+      (bound-id-table-set! vertices name vertex)))
+
+  (define components (tarjan vertices))
+
+  ;; no-self-cycle? : (Vertex Id (Listof Id)) -> Boolean
+  (define (no-self-cycle? vertex)
+    (match-define (lr-clause names _ _) (vertex-data vertex))
+    (for/and ([id (in-list names)])
+      (andmap (λ (id2) (not (bound-identifier=? id id2)))
+              (vertex-adjacent vertex))))
+
+  ;; The components with only one entry are non-recursive
+  (for/fold ([non-recursive '()]
+             [remaining '()])
+            ([component components])
+    (cond [(and (= (length component) 1)
+                (no-self-cycle? (car component)))
+           (values (cons (vertex-data (car component)) non-recursive)
+                   remaining)]
+          [else
+           (values non-recursive
+                   (append (map vertex-data component)
+                           remaining))])))
 
 ;; check-non-recursive-clauses : (Listof lr-clause) ->
 ;;                               (Listof Identifier) (Listof Type)
diff --git a/pkgs/typed-racket-pkgs/typed-racket-test/tests/typed-racket/unit-tests/typecheck-tests.rkt b/pkgs/typed-racket-pkgs/typed-racket-test/tests/typed-racket/unit-tests/typecheck-tests.rkt
index c569b85d92..459d5ec584 100644
--- a/pkgs/typed-racket-pkgs/typed-racket-test/tests/typed-racket/unit-tests/typecheck-tests.rkt
+++ b/pkgs/typed-racket-pkgs/typed-racket-test/tests/typed-racket/unit-tests/typecheck-tests.rkt
@@ -817,11 +817,6 @@
                   (define (y) (x))
                   1)]
 
-        [tc-err (let ()
-                  (define (x) (y))
-                  (define (y) 3)
-                  1)]
-
         [tc-e ((case-lambda:
                 [[x : Number *] (+ 1 (car x))])
                5)
@@ -2415,6 +2410,41 @@
                #:msg "Recursive #:implements clause not allowed"]
        [tc-err (let () (define-type-alias X (U X #f)) "dummy")
                #:msg "Recursive types are not allowed directly inside"]
+
+       ;; Check the more precise Tarjan's algorithm-based letrec-values type checking
+       [tc-e ;; An example from Eric Dobson (see gh372) that shows that precisely
+             ;; finding cycles is necessary for checking more letrecs.
+             (let ()
+               (: foo (-> String))
+               (define (foo)
+                 (: bn (Integer -> Integer))
+                 (define (bn n) (if (= n 0) 1 (bn (- n 1))))
+                 (define v (bn 0))
+                 "foo")
+               (foo))
+             -String]
+       [tc-e (letrec-values ([(a b) (values x y)]
+                             [(x y) (values "x" "y")])
+               a)
+             -String]
+       [tc-e (letrec-values ([(a b) (values x "b")]
+                             [(x y) (values "x" "y")])
+               a)
+             -String]
+       [tc-e (letrec-values ([(a b) (values "a" "b")]
+                             [(x y) (values z z)]
+                             [(z) a])
+               z)
+             -String]
+       [tc-err (letrec-values ([(a b) (values x "b")]
+                               [(x y) (values a b)])
+                 a)
+               #:msg "insufficient type information"]
+       [tc-err (letrec-values ([(a) (values x)]
+                               [(x) (values z)]
+                               [(z) (values a)])
+                 a)
+               #:msg "insufficient type information"]
         )
   (test-suite
    "tc-literal tests"