Quick question: if a character with the mystics TA is KO, does the attacker still suffers the penetrating damage from the TA? My current group says no, but there seems to be a bystander using the mystics TA coming in the next expansion, so it has us wondering...

Yes, once Mystics is triggered, it MUST resolve even if the figure that had it is KOd.

Barring a way to soak up penetrating damage like Invincible, yes, you will be eating that point of pain.