No, Tim Smith has not been arrested for illegally distilling liquor.
Although it's possible that an arrest could happen in the show, it's important to remember that while Discovery Channel is hyping Moonshiners as a "reality show," it's really a dramatization. They are not filming real events, these are all staged.
In fact, folks in Virginia have been writing in to the Virginia Department of Alcoholic Beverage Control to ask why these illegal activities are being allowed to continue. VDABC Spokeswoman Kathleen Shaw told The Associated Press "the show is a dramatization, and no illegal liquor is actually being produced."
Season 2 of Moonshiners just wrapped up with three special episodes. No word yet on when a third season begins.
Of interest, stars from the Discovery channel hit show recently made an appearance at Screwie Louie's Porpoise Pub in Seminole, Florida for a fundraising event. All the money raised went to pay for a young car accident victim's out-of-pocket medical costs.