diff --git a/src/compiler/checker.ts b/src/compiler/checker.ts
index 1f3882dff7269..91bbf4d29d3f0 100644
--- a/src/compiler/checker.ts
+++ b/src/compiler/checker.ts
@@ -6240,6 +6240,12 @@ export function createTypeChecker(host: TypeCheckerHost): TypeChecker {
                     }
                 }
                 let annotationType = getTypeFromTypeNodeWithoutContext(existing);
+                if (isErrorType(annotationType)) {
+                    // allow "reusing" type nodes that resolve to error types
+                    // those can't truly be reused but it prevents cascading errors in isolatedDeclarations
+                    // for source with errors there is no guarantee to emit correct code anyway
+                    return true;
+                }
                 if (requiresAddingUndefined && annotationType) {
                     annotationType = getOptionalType(annotationType, !isParameter(node));
                 }
@@ -49681,7 +49687,10 @@ export function createTypeChecker(host: TypeCheckerHost): TypeChecker {
         const typeNode = getNonlocalEffectiveTypeAnnotationNode(parameter);
         if (!typeNode) return false;
         const type = getTypeFromTypeNode(typeNode);
-        return containsUndefinedType(type);
+        // allow error type here to avoid confusing errors that the annotation has to contain undefined when it does in cases like this:
+        //
+        // export function fn(x?: Unresolved | undefined): void {}
+        return isErrorType(type) || containsUndefinedType(type);
     }
 
     function requiresAddingImplicitUndefined(parameter: ParameterDeclaration | JSDocParameterTag, enclosingDeclaration: Node | undefined) {
diff --git a/tests/baselines/reference/circularTypeofWithVarOrFunc.types b/tests/baselines/reference/circularTypeofWithVarOrFunc.types
index 823cd27cbd554..4c23e013d7626 100644
--- a/tests/baselines/reference/circularTypeofWithVarOrFunc.types
+++ b/tests/baselines/reference/circularTypeofWithVarOrFunc.types
@@ -22,16 +22,16 @@ type typeAlias2 = typeof varOfAliasedType2;
 >                  : ^^^
 
 function func(): typeAlias3 { return null; }
->func : () => any
->     : ^^^^^^^^^
+>func : () => typeAlias3
+>     : ^^^^^^          
 
 var varOfAliasedType3 = func();
 >varOfAliasedType3 : any
 >                  : ^^^
 >func() : any
 >       : ^^^
->func : () => any
->     : ^^^^^^^^^
+>func : () => typeAlias3
+>     : ^^^^^^          
 
 type typeAlias3 = typeof varOfAliasedType3;
 >typeAlias3 : any
@@ -54,12 +54,12 @@ interface Input {
 type R = ReturnType<typeof mul>;
 >R : any
 >  : ^^^
->mul : (input: Input) => any
->    : ^     ^^     ^^^^^^^^
+>mul : (input: Input) => R
+>    : ^     ^^     ^^^^^ 
 
 function mul(input: Input): R {
->mul : (input: Input) => any
->    : ^     ^^     ^^^^^^^^
+>mul : (input: Input) => R
+>    : ^     ^^     ^^^^^ 
 >input : Input
 >      : ^^^^^
 
@@ -85,12 +85,12 @@ function mul(input: Input): R {
 type R2 = ReturnType<typeof f>;
 >R2 : any
 >   : ^^^
->f : () => any
->  : ^^^^^^^^^
+>f : () => R2
+>  : ^^^^^^  
 
 function f(): R2 { return 0; }
->f : () => any
->  : ^^^^^^^^^
+>f : () => R2
+>  : ^^^^^^  
 >0 : 0
 >  : ^
 
diff --git a/tests/baselines/reference/isolatedDeclarationErrorTypes1.errors.txt b/tests/baselines/reference/isolatedDeclarationErrorTypes1.errors.txt
new file mode 100644
index 0000000000000..f89ec2f8264de
--- /dev/null
+++ b/tests/baselines/reference/isolatedDeclarationErrorTypes1.errors.txt
@@ -0,0 +1,14 @@
+isolatedDeclarationErrorTypes1.ts(3,28): error TS2307: Cannot find module 'foo' or its corresponding type declarations.
+
+
+==== isolatedDeclarationErrorTypes1.ts (1 errors) ====
+    // https://github.com/microsoft/TypeScript/issues/60192
+    
+    import { Unresolved } from "foo";
+                               ~~~~~
+!!! error TS2307: Cannot find module 'foo' or its corresponding type declarations.
+    
+    export const foo1 = (type?: Unresolved): void => {};
+    export const foo2 = (type?: Unresolved | undefined): void => {};
+    export const foo3 = (type: Unresolved): void => {};
+    
\ No newline at end of file
diff --git a/tests/baselines/reference/isolatedDeclarationErrorTypes1.js b/tests/baselines/reference/isolatedDeclarationErrorTypes1.js
new file mode 100644
index 0000000000000..1949d31f6b9dd
--- /dev/null
+++ b/tests/baselines/reference/isolatedDeclarationErrorTypes1.js
@@ -0,0 +1,30 @@
+//// [tests/cases/compiler/isolatedDeclarationErrorTypes1.ts] ////
+
+//// [isolatedDeclarationErrorTypes1.ts]
+// https://github.com/microsoft/TypeScript/issues/60192
+
+import { Unresolved } from "foo";
+
+export const foo1 = (type?: Unresolved): void => {};
+export const foo2 = (type?: Unresolved | undefined): void => {};
+export const foo3 = (type: Unresolved): void => {};
+
+
+//// [isolatedDeclarationErrorTypes1.js]
+"use strict";
+// https://github.com/microsoft/TypeScript/issues/60192
+Object.defineProperty(exports, "__esModule", { value: true });
+exports.foo3 = exports.foo2 = exports.foo1 = void 0;
+const foo1 = (type) => { };
+exports.foo1 = foo1;
+const foo2 = (type) => { };
+exports.foo2 = foo2;
+const foo3 = (type) => { };
+exports.foo3 = foo3;
+
+
+//// [isolatedDeclarationErrorTypes1.d.ts]
+import { Unresolved } from "foo";
+export declare const foo1: (type?: Unresolved) => void;
+export declare const foo2: (type?: Unresolved | undefined) => void;
+export declare const foo3: (type: Unresolved) => void;
diff --git a/tests/baselines/reference/isolatedDeclarationErrorTypes1.symbols b/tests/baselines/reference/isolatedDeclarationErrorTypes1.symbols
new file mode 100644
index 0000000000000..c7da06e14380b
--- /dev/null
+++ b/tests/baselines/reference/isolatedDeclarationErrorTypes1.symbols
@@ -0,0 +1,23 @@
+//// [tests/cases/compiler/isolatedDeclarationErrorTypes1.ts] ////
+
+=== isolatedDeclarationErrorTypes1.ts ===
+// https://github.com/microsoft/TypeScript/issues/60192
+
+import { Unresolved } from "foo";
+>Unresolved : Symbol(Unresolved, Decl(isolatedDeclarationErrorTypes1.ts, 2, 8))
+
+export const foo1 = (type?: Unresolved): void => {};
+>foo1 : Symbol(foo1, Decl(isolatedDeclarationErrorTypes1.ts, 4, 12))
+>type : Symbol(type, Decl(isolatedDeclarationErrorTypes1.ts, 4, 21))
+>Unresolved : Symbol(Unresolved, Decl(isolatedDeclarationErrorTypes1.ts, 2, 8))
+
+export const foo2 = (type?: Unresolved | undefined): void => {};
+>foo2 : Symbol(foo2, Decl(isolatedDeclarationErrorTypes1.ts, 5, 12))
+>type : Symbol(type, Decl(isolatedDeclarationErrorTypes1.ts, 5, 21))
+>Unresolved : Symbol(Unresolved, Decl(isolatedDeclarationErrorTypes1.ts, 2, 8))
+
+export const foo3 = (type: Unresolved): void => {};
+>foo3 : Symbol(foo3, Decl(isolatedDeclarationErrorTypes1.ts, 6, 12))
+>type : Symbol(type, Decl(isolatedDeclarationErrorTypes1.ts, 6, 21))
+>Unresolved : Symbol(Unresolved, Decl(isolatedDeclarationErrorTypes1.ts, 2, 8))
+
diff --git a/tests/baselines/reference/isolatedDeclarationErrorTypes1.types b/tests/baselines/reference/isolatedDeclarationErrorTypes1.types
new file mode 100644
index 0000000000000..2e388cf0a734a
--- /dev/null
+++ b/tests/baselines/reference/isolatedDeclarationErrorTypes1.types
@@ -0,0 +1,33 @@
+//// [tests/cases/compiler/isolatedDeclarationErrorTypes1.ts] ////
+
+=== isolatedDeclarationErrorTypes1.ts ===
+// https://github.com/microsoft/TypeScript/issues/60192
+
+import { Unresolved } from "foo";
+>Unresolved : any
+>           : ^^^
+
+export const foo1 = (type?: Unresolved): void => {};
+>foo1 : (type?: Unresolved) => void
+>     : ^    ^^^          ^^^^^    
+>(type?: Unresolved): void => {} : (type?: Unresolved) => void
+>                                : ^    ^^^          ^^^^^    
+>type : any
+>     : ^^^
+
+export const foo2 = (type?: Unresolved | undefined): void => {};
+>foo2 : (type?: Unresolved | undefined) => void
+>     : ^    ^^^                      ^^^^^    
+>(type?: Unresolved | undefined): void => {} : (type?: Unresolved | undefined) => void
+>                                            : ^    ^^^                      ^^^^^    
+>type : any
+>     : ^^^
+
+export const foo3 = (type: Unresolved): void => {};
+>foo3 : (type: Unresolved) => void
+>     : ^    ^^          ^^^^^    
+>(type: Unresolved): void => {} : (type: Unresolved) => void
+>                               : ^    ^^          ^^^^^    
+>type : Unresolved
+>     : ^^^^^^^^^^
+
diff --git a/tests/baselines/reference/isolatedDeclarationsAddUndefined2.errors.txt b/tests/baselines/reference/isolatedDeclarationsAddUndefined2.errors.txt
new file mode 100644
index 0000000000000..638ebb2a8865c
--- /dev/null
+++ b/tests/baselines/reference/isolatedDeclarationsAddUndefined2.errors.txt
@@ -0,0 +1,48 @@
+isolatedDeclarationsAddUndefined2.ts(4,29): error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+isolatedDeclarationsAddUndefined2.ts(8,29): error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+isolatedDeclarationsAddUndefined2.ts(12,28): error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+isolatedDeclarationsAddUndefined2.ts(16,28): error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+isolatedDeclarationsAddUndefined2.ts(19,27): error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+isolatedDeclarationsAddUndefined2.ts(21,27): error TS2304: Cannot find name 'Unresolved'.
+isolatedDeclarationsAddUndefined2.ts(23,27): error TS2304: Cannot find name 'Unresolved'.
+
+
+==== isolatedDeclarationsAddUndefined2.ts (7 errors) ====
+    // https://github.com/microsoft/TypeScript/issues/60123
+    
+    export class Bar {
+        constructor(private x?: Array | undefined) {}
+                                ~~~~~
+!!! error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+    }
+    
+    export class Bar2 {
+        constructor(private x?: Array) {}
+                                ~~~~~
+!!! error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+    }
+    
+    export class Bar3 {
+        constructor(private x: Array | undefined) {}
+                               ~~~~~
+!!! error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+    }
+    
+    export class Bar4 {
+        constructor(private x: Array) {}
+                               ~~~~~
+!!! error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+    }
+    
+    export function test1(x?: Array | undefined): void {}
+                              ~~~~~
+!!! error TS2314: Generic type 'Array<T>' requires 1 type argument(s).
+    
+    export function test2(x?: Unresolved | undefined): void {}
+                              ~~~~~~~~~~
+!!! error TS2304: Cannot find name 'Unresolved'.
+    
+    export function test3(x?: Unresolved): void {}
+                              ~~~~~~~~~~
+!!! error TS2304: Cannot find name 'Unresolved'.
+    
\ No newline at end of file
diff --git a/tests/baselines/reference/isolatedDeclarationsAddUndefined2.js b/tests/baselines/reference/isolatedDeclarationsAddUndefined2.js
new file mode 100644
index 0000000000000..e3f3f7ef3dbcd
--- /dev/null
+++ b/tests/baselines/reference/isolatedDeclarationsAddUndefined2.js
@@ -0,0 +1,89 @@
+//// [tests/cases/compiler/isolatedDeclarationsAddUndefined2.ts] ////
+
+//// [isolatedDeclarationsAddUndefined2.ts]
+// https://github.com/microsoft/TypeScript/issues/60123
+
+export class Bar {
+    constructor(private x?: Array | undefined) {}
+}
+
+export class Bar2 {
+    constructor(private x?: Array) {}
+}
+
+export class Bar3 {
+    constructor(private x: Array | undefined) {}
+}
+
+export class Bar4 {
+    constructor(private x: Array) {}
+}
+
+export function test1(x?: Array | undefined): void {}
+
+export function test2(x?: Unresolved | undefined): void {}
+
+export function test3(x?: Unresolved): void {}
+
+
+//// [isolatedDeclarationsAddUndefined2.js]
+"use strict";
+// https://github.com/microsoft/TypeScript/issues/60123
+Object.defineProperty(exports, "__esModule", { value: true });
+exports.Bar4 = exports.Bar3 = exports.Bar2 = exports.Bar = void 0;
+exports.test1 = test1;
+exports.test2 = test2;
+exports.test3 = test3;
+var Bar = /** @class */ (function () {
+    function Bar(x) {
+        this.x = x;
+    }
+    return Bar;
+}());
+exports.Bar = Bar;
+var Bar2 = /** @class */ (function () {
+    function Bar2(x) {
+        this.x = x;
+    }
+    return Bar2;
+}());
+exports.Bar2 = Bar2;
+var Bar3 = /** @class */ (function () {
+    function Bar3(x) {
+        this.x = x;
+    }
+    return Bar3;
+}());
+exports.Bar3 = Bar3;
+var Bar4 = /** @class */ (function () {
+    function Bar4(x) {
+        this.x = x;
+    }
+    return Bar4;
+}());
+exports.Bar4 = Bar4;
+function test1(x) { }
+function test2(x) { }
+function test3(x) { }
+
+
+//// [isolatedDeclarationsAddUndefined2.d.ts]
+export declare class Bar {
+    private x?;
+    constructor(x?: Array | undefined);
+}
+export declare class Bar2 {
+    private x?;
+    constructor(x?: Array);
+}
+export declare class Bar3 {
+    private x;
+    constructor(x: Array | undefined);
+}
+export declare class Bar4 {
+    private x;
+    constructor(x: Array);
+}
+export declare function test1(x?: Array | undefined): void;
+export declare function test2(x?: Unresolved | undefined): void;
+export declare function test3(x?: Unresolved): void;
diff --git a/tests/baselines/reference/isolatedDeclarationsAddUndefined2.symbols b/tests/baselines/reference/isolatedDeclarationsAddUndefined2.symbols
new file mode 100644
index 0000000000000..9778b309c7495
--- /dev/null
+++ b/tests/baselines/reference/isolatedDeclarationsAddUndefined2.symbols
@@ -0,0 +1,52 @@
+//// [tests/cases/compiler/isolatedDeclarationsAddUndefined2.ts] ////
+
+=== isolatedDeclarationsAddUndefined2.ts ===
+// https://github.com/microsoft/TypeScript/issues/60123
+
+export class Bar {
+>Bar : Symbol(Bar, Decl(isolatedDeclarationsAddUndefined2.ts, 0, 0))
+
+    constructor(private x?: Array | undefined) {}
+>x : Symbol(Bar.x, Decl(isolatedDeclarationsAddUndefined2.ts, 3, 16))
+>Array : Symbol(Array, Decl(lib.es5.d.ts, --, --), Decl(lib.es5.d.ts, --, --))
+}
+
+export class Bar2 {
+>Bar2 : Symbol(Bar2, Decl(isolatedDeclarationsAddUndefined2.ts, 4, 1))
+
+    constructor(private x?: Array) {}
+>x : Symbol(Bar2.x, Decl(isolatedDeclarationsAddUndefined2.ts, 7, 16))
+>Array : Symbol(Array, Decl(lib.es5.d.ts, --, --), Decl(lib.es5.d.ts, --, --))
+}
+
+export class Bar3 {
+>Bar3 : Symbol(Bar3, Decl(isolatedDeclarationsAddUndefined2.ts, 8, 1))
+
+    constructor(private x: Array | undefined) {}
+>x : Symbol(Bar3.x, Decl(isolatedDeclarationsAddUndefined2.ts, 11, 16))
+>Array : Symbol(Array, Decl(lib.es5.d.ts, --, --), Decl(lib.es5.d.ts, --, --))
+}
+
+export class Bar4 {
+>Bar4 : Symbol(Bar4, Decl(isolatedDeclarationsAddUndefined2.ts, 12, 1))
+
+    constructor(private x: Array) {}
+>x : Symbol(Bar4.x, Decl(isolatedDeclarationsAddUndefined2.ts, 15, 16))
+>Array : Symbol(Array, Decl(lib.es5.d.ts, --, --), Decl(lib.es5.d.ts, --, --))
+}
+
+export function test1(x?: Array | undefined): void {}
+>test1 : Symbol(test1, Decl(isolatedDeclarationsAddUndefined2.ts, 16, 1))
+>x : Symbol(x, Decl(isolatedDeclarationsAddUndefined2.ts, 18, 22))
+>Array : Symbol(Array, Decl(lib.es5.d.ts, --, --), Decl(lib.es5.d.ts, --, --))
+
+export function test2(x?: Unresolved | undefined): void {}
+>test2 : Symbol(test2, Decl(isolatedDeclarationsAddUndefined2.ts, 18, 53))
+>x : Symbol(x, Decl(isolatedDeclarationsAddUndefined2.ts, 20, 22))
+>Unresolved : Symbol(Unresolved)
+
+export function test3(x?: Unresolved): void {}
+>test3 : Symbol(test3, Decl(isolatedDeclarationsAddUndefined2.ts, 20, 58))
+>x : Symbol(x, Decl(isolatedDeclarationsAddUndefined2.ts, 22, 22))
+>Unresolved : Symbol(Unresolved)
+
diff --git a/tests/baselines/reference/isolatedDeclarationsAddUndefined2.types b/tests/baselines/reference/isolatedDeclarationsAddUndefined2.types
new file mode 100644
index 0000000000000..6ddcad9a53930
--- /dev/null
+++ b/tests/baselines/reference/isolatedDeclarationsAddUndefined2.types
@@ -0,0 +1,59 @@
+//// [tests/cases/compiler/isolatedDeclarationsAddUndefined2.ts] ////
+
+=== isolatedDeclarationsAddUndefined2.ts ===
+// https://github.com/microsoft/TypeScript/issues/60123
+
+export class Bar {
+>Bar : Bar
+>    : ^^^
+
+    constructor(private x?: Array | undefined) {}
+>x : any
+>  : ^^^
+}
+
+export class Bar2 {
+>Bar2 : Bar2
+>     : ^^^^
+
+    constructor(private x?: Array) {}
+>x : any
+>  : ^^^
+}
+
+export class Bar3 {
+>Bar3 : Bar3
+>     : ^^^^
+
+    constructor(private x: Array | undefined) {}
+>x : any
+>  : ^^^
+}
+
+export class Bar4 {
+>Bar4 : Bar4
+>     : ^^^^
+
+    constructor(private x: Array) {}
+>x : any
+>  : ^^^
+}
+
+export function test1(x?: Array | undefined): void {}
+>test1 : (x?: Array | undefined) => void
+>      : ^ ^^^                 ^^^^^    
+>x : any
+>  : ^^^
+
+export function test2(x?: Unresolved | undefined): void {}
+>test2 : (x?: Unresolved | undefined) => void
+>      : ^ ^^^                      ^^^^^    
+>x : any
+>  : ^^^
+
+export function test3(x?: Unresolved): void {}
+>test3 : (x?: Unresolved) => void
+>      : ^ ^^^          ^^^^^    
+>x : any
+>  : ^^^
+
diff --git a/tests/cases/compiler/isolatedDeclarationErrorTypes1.ts b/tests/cases/compiler/isolatedDeclarationErrorTypes1.ts
new file mode 100644
index 0000000000000..a94ea0d47b242
--- /dev/null
+++ b/tests/cases/compiler/isolatedDeclarationErrorTypes1.ts
@@ -0,0 +1,13 @@
+// @isolatedDeclarations: true
+// @strict: true
+// @declaration: true
+// @moduleResolution: nodenext
+// @module: nodenext
+
+// https://github.com/microsoft/TypeScript/issues/60192
+
+import { Unresolved } from "foo";
+
+export const foo1 = (type?: Unresolved): void => {};
+export const foo2 = (type?: Unresolved | undefined): void => {};
+export const foo3 = (type: Unresolved): void => {};
diff --git a/tests/cases/compiler/isolatedDeclarationsAddUndefined2.ts b/tests/cases/compiler/isolatedDeclarationsAddUndefined2.ts
new file mode 100644
index 0000000000000..ef28b2c542e25
--- /dev/null
+++ b/tests/cases/compiler/isolatedDeclarationsAddUndefined2.ts
@@ -0,0 +1,27 @@
+// @isolatedDeclarations: true
+// @declaration: true
+// @strict: true
+
+// https://github.com/microsoft/TypeScript/issues/60123
+
+export class Bar {
+    constructor(private x?: Array | undefined) {}
+}
+
+export class Bar2 {
+    constructor(private x?: Array) {}
+}
+
+export class Bar3 {
+    constructor(private x: Array | undefined) {}
+}
+
+export class Bar4 {
+    constructor(private x: Array) {}
+}
+
+export function test1(x?: Array | undefined): void {}
+
+export function test2(x?: Unresolved | undefined): void {}
+
+export function test3(x?: Unresolved): void {}