I need brief explanation of how Google automatic penalty works

Selected answers from the Dumb SEO Questions Facebook & G+ community.

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  Gerry White: why do you think you have a penalty ? the reason I ask this is often people make assumptions about these sort of things - if you do have an algorithmic penalty, it tends to disapear once you have resolved issues - however it would be good to know why you think there is an issue, are you using Sistrix or SearchMetrics to track the drop ?
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  Michael Martinez: There is really no such thing as "an automatic penalty". A penalty is a manual action where a Google Webspam team member flags your site in their system. The penalty prevents the site from ranking for anything. The "automatic" adjustments from algorithms like Panda (on-page quality) appear to adjust a page`s final Information Retrieval (IR) score for a given query, perhaps by adjusting the (internally computed) PageRank value up or down (the mechanism of adjustment has never been disclosed by Google). A link assessment algorithm like Penguin (4.0) may assign some sort of negative or positive adjustment to the PageRank value passed by a link, or it may simply flag the link to be ignored. According to Google, you can compensate for a lot of bad links with a lot of good links (although they recommend against building links for the sake of influencing search results, as that violates their guidelines and could lead to a manual action).