yes Martin is correct. If the Immigration Officer is exposed then all of the visas they did incorrectly are cancelled. Not worth the risk to save an hours work filling in a simple form and providing a few documents.
I forgot to explain, the process is very simple. Find the section that prepares the residency letter, give them your documents, they will check them and you pay the fee. Hua Hin and Sri Racha issue the letter within a few minutes, but some offices post them out the next day. I always go when I think it will be quiet, maybe 2pm on a Thursday (something like that). You need one of these letters for other things too, like opening a bank account or buying/registering a car/motorcycle. Good luck.
it is proof of residency. The immigration requirements vary, so it's worth checking with the one closest to you, but it's the usual stuff; passport, visa, house lease agreement all with photocopies a passport photograph and 200 baht at my local immigration (although online I read some cost 500 and some are free).
I think it will vary by Transport office, so probably worth checking with them. I did mine this week and I got my medical certificate and immigration letter a couple of weeks ago. Good luck.
you can renew it up to a year after expiry without starting from scratch, but you are not allowed to drive without a current licence. If you do you are breaking the law and also not insured, so not recommended. It's true that when you renew you get 5 years plus up to your next birthday, so if you time it right you can get a nearly 6 year licence.