A currently certified pilot has two choice. He can take the online test, currently available, present this certificate along with proof of a flight review within the last two years, his or her pilot certificate and a government issued photo id. If the pilot is not currently active the requirement to complete a flight review may be undesirable. The certifying CFI, DPE or Inspector will certify that you have presented this information to him and will sign your IACRA application electronically. If you use a DPE or Inspector, they will destroy your current pilot certificate and issue you a temporary. If you use an CFI he will not issue a temporary as it will be emailed to you within a few day, the CFI will therefore not destroy your current certificate.
Option two is to just take the test at a CATS or other testing center every two year. This still requires an IACRA application, but since the testing center has certified your identity you will not need to take the test results to a certifying officer. Instead you will be able to process your own application online through IACRA.
In all cases you will end up with a temporary certificate that will be present to you by the DPE or Inspector, or emailed to you if you take the CATS test or have you application certified by an CFI. The temporary is good for only 120 days.
Within the 120 day you should receive a pilot certificate in the mail.
Remember, in all cases you will need to be vetted by the TSA.
He is incorrect. While this may be exactly what he intends to do, this is not what he is required to do. But hey, he is an inspector, he can do whatever he wants.