There's really nothing quite like the experience of typing in your main keyword only to find your site no longer at the top of the results. The resulting panic has no doubt triggered heart failure for some poor site owners, although we'll never see those stats. But the numbers of sites getting tanked by penalties is not small. So if you just discovered you're penalized, take comfort in the fact that you're not alone.
Google takes "manual actions' against websites that they perceive to be harmful to the search, or to Google. Because of the huge consequences of such actions, Google did not even acknowledge penalties until only very recently, and even then on a very limited basis. It is very likely that if you are penalized, you won't hear about it from Google. This is changing, ever so slowly, and if you received a message in Webmaster Tools that you are in violation of the guidelines, consider yourself very lucky. The vast majority of penalties come unannounced and therefore with no direction for cure. A message from Google may even be specific - we're aware of messages referencing paid links and doorway pages.
Here's a rare, actual message from Google that you never want to see. This one telling you that you have paid links:
However unwelcome this message, it's way better than just getting penalized without notice. At least in this instance you kind of know why.
If, like most penalized sites, you never received a warning, only the rank loss, it's time to start learning about something called "search compliance" - being non-compliant is what gets sites penalized. The fix is NOT seo. In fact, optimizing a non-compliant structure will either fail, or trigger an event. Penalized sites need to understand that the way out is not via seo, but by addressing the search compliance issue. And if you don't know why you're penalized, there's a lot of information that you should read before you do anything.
Here's our growing list of penalty references, starting with videos from Google:
general info:
http://www.youtube.com/watch?v=ES01L4xjSXE
http://www.youtube.com/watch?v=UpK1VGJN4XY
reconsideration:
http://www.youtube.com/watch?v=aaBSHslQ0Ew
http://www.youtube.com/watch?v=G959-2RlPyA