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After digging in, I don't think this is an issue on the app side.
If I just try to sign a "raw" transaction directly from the Polkadot portal using Talisman with a Polkadot Vault account, I get the same error:
Transaction
Result
For polkadot.js, same thing:
Transaction and Result
I found this Github issue which supposedly fixed the issue. This issue was closed in October 2022 but Polkadot.js extension has not been updated since June 2022 so the fix is not reflected in the extension so that explains the issue with Polkadot.js.
For Talisman, I found this statement in an open issue:
Currently Talisman inherits its signing logic directly from the polkadot.js extension. So, if polkadot.js can sign something, we should be able to too, and if we can't but they can, we would consider it a bug.
So ultimately, I think the the polkadot.js folks need to release a new version/extension and this will resolve both the polkadot.js extension and Talisman issue.
It appears that there is an open to do for this in the polkadot.js extension repo with activity as recently as August 29 so they appear to be working on it. Until this is done, I don't think there is anything we can do on our end. Once they release the new version, then we would may need to update a few packages like @polkadot/extension-dapp and @subwallet/wallet-connect.
High priority bug
Bug report
Steps to Reproduce
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