With the penalties add-on, drivers can be punished with a time penalty or lap subtraction. For this, anytime during a race a penalty dialog can be opened from which the driver and penalty can be selected. You can either assign time penalties (2, 5 or 10 seconds) or lap subtraction. If a driver receives a penalty, they have to stay at the pits for the selected amount of time and are not allowed to fuel up while the penalty is being served. If they fuel up nonetheless, the serving is stopped and they have to go to the pits again.
If lap subtraction is being selected as the penalty, a lap is being subtracted from the laps that the selected driver has already done. The penalty dialog can be opened multiple times straight, so a driver can receive more than one penalty at once.