Hi John!
Good questions. I'll answer it in 3 parts for the sake of organization:
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No - Google does not penalize anyone for hiding their address. If the business does not receive customers at a staffed location during stated hours of operation, then not hiding the address is a violation of Google's guidelines (see: https://support.google.com/business/answer/3038177?hl=en) and this violation is what could lead to possible action on Google's part. So, don't think of hiding the address as something that will incur a penalty.
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That being said, there is a school of thought in the Local SEO world that in a scenario of uneven competition, businesses with a staffed, physical office that welcomes customers during stated business hours may have a slight advantage over competitors who do not have these amenities and are therefore hiding their address in compliance with Google's guidelines. So, the nuance to understand here is that if in the 7 or 3 packs in your client's industry/geography, some competitors can show their address while others have to hide it, the former may have some advantage. No one knows the exact degree of this hypothetical advantage, but it may exist. On the other hand, if in your client's packs, all of their competitors are in the same boat and are having to hide their addresses, the playing field is completely even so no one has any hypothetical advantage. It just depends on what the field of competition is like in your client's packs.
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To my knowledge, Google is the only major engine with this hidden address requirement. For any other local business platform, the choice to display or hide the address is a personal one. Your clients can be broken down into two categories, when it comes to this:
a- Client has privacy concerns and doesn't want their street address displayed anywhere. In this case, the Local SEO on the project will need to stick to building citations only on those platforms that support hidden addresses.
b- Client has no privacy concerns and doesn't care if their street address is displayed in various places. In this case, there are no restrictions on where you can build citations.
Obviously, client B is at an advantage, because he will be able to create citations in more places.
Hope this breakdown helps clarify your options.