Two brothers who operate a coal production and brokerage firm in Prince George's County have been indicted on charges of failing to pay $1.4 million in state taxes on $20 million in income in the last five years.

Prosecutors said the indictment represents the largest case of alleged tax evasion in Maryland history.

The indictments were handed down Feb. 21 and opened yesterday against Dominick LaRosa, 44, and Joseph LaRosa, 40, both of Bethesda. The LaRosas turned themselves in to authorities in Annapolis yesterday and were released on their own recognizance by Anne Arundel Circuit Judge Bruce C. Williams.

"They assert their innocence," attorney Michael E. Marr said yesterday after a morning court appearance in which he emphasized his clients had legally delayed reporting part of their income. "They dealt honestly with their returns."

The indictment had been sealed to allow Marr time to argue the legality of the brothers' actions, according to Assistant Attorney General Joseph L. Evans. "We were not persuaded," he said.

Charged in the 12-count indictment are Dominick LaRosa, company president; Joseph LaRosa, company vice president, and the LaRosa's International Fuel Co. Inc., a family-owned multimillion-dollar Oxon Hill coal firm begun in 1975.

Dominick LaRosa, a former computer programmer with the Pentagon, is charged with filing false personal returns from 1981 through 1983. Joseph LaRosa, an accountant for a mortgage banking firm in Chevy Chase, is charged with filing false personal returns in 1982 and 1983 and false corporate returns from 1981 through 1983. The coal firm is charged with filing false corporate returns during the same time period, according to the indictment.

According to prosecutors' estimates, the state lost $1.4 million in taxes because of what they said were false reports filed by the LaRosas and their company. Each count carries a maximum penalty of 10 years in prison upon conviction and requires the payment of taxes and an additional fine of 50 percent of the taxes due.

The total payment for which the Rosas could be liable is more than $2 million, according to the attorney general's office, which conducted the 14-month investigation with state police.

"Certainly, this is the largest state tax case . . . in Maryland," said Assistant Attorney General Evans. He said he did not know if the Internal Revenue Service would conduct a separate investigation to collect federal taxes.

Marr said he believes his clients are not being investigated by federal tax officials. An IRS investigator declined to comment.

Marr, who described his clients yesterday as "stellar businessmen," said the LaRosas legally did not report income from certain coal transactions until the contracts, which lasted five years, were fulfilled. That is a procedure allowed under state and federal tax laws and is an accounting device known as the "long-term completed contract method," Marr said.

Using that method, the LaRosas paid $1.6 million in state taxes a week ago from a contract that ended in 1984, Marr said. The fuel company expects a $750,000 refund from that payment, he added.

The LaRosas "will vigorously defend themselves against these charges," said Marr, who also filed a motion questioning the authority of the Anne Arundel grand jury to investigate tax returns filed in other counties. Evans said indictments were brought in Anne Arundel County because that's where state taxes are filed.

The indictment against the LaRosas came from the latest of more than 20 investigations of alleged state income tax evasion that the attorney general's office has conducted in four years.