The Internal Revenue Service routinely paid more than $500,000 in tax refunds over the last 8 1/2 years to a husband and wife living in the Swiss village of Thalwil after they allegedly filed 137 tax returns using fictitious names, government prosecutors here and in New Jersey charged yesterday.

In what authorities said is one of the largest U.S. tax fraud cases involving individuals in history, an indictment alleged the couple, a German national named Arno Arndt and his Swiss wife Marlise, used more than 60 bogus names on the tax returns and prepared phony W-2 wage statements claiming the people were employed in New York City at places where the couple had worked in the late 1960s.

The alleged scheme was revealed as fudges here and in New Jersey unsealed indictments charging the Arndts with mail fraud. The indictment here had been sealed for the last 14 months while U.S. officials unsuccessfully tried to persuade the Swiss government to extradite the couple to stand trial in the United States.

The Swiss officials earlier this month told the United States it would not extradite the Arndts, but that it would prosecute the couple under Swiss law if the United States is willing to assist in the case. Prosecutors here said they would do that if the Swiss cannot be persuaded to change their extradition decision.

Embarrassed IRS officials only discovered the alleged tax scheme by accident and Assistant U.S. Attorney Raymond Banoun told a federal judge here yesterday that the scheme is still continuing. However, IRS spokesman Rod Young said that the agency has "frozen checks to all known false names" that the Arndts allegedly used.

"It's like a bath tub without a plug" Banoun said. "It goes on forever. The Treasury is being drained."

Reached by telephone in Thalwil, Arno Arndt expressed surprise at the charges and said he "totally" denies them.

"That is nonsense," declared Arndt, 39, who said he lives with his 32-year-old wife and two children, ages 4 and 6 in a three-room rented apartment. "Thirty times I sent tax returns? Is there confusion? Are you calling the correct figure? A half million from the U.S.? Absolutely absurd."

But Arndt, who said he makes $32,000 a year as an electrical supplies salesman and travels to the U.S. every three or four months or so on business, ssemed delighted that the American press would be writing about him.

"My name in The Washington Post? I invite you for dinner in Switzerland. This is really very amusing," he joked.

But then he turned serious as the conversation with a reporter was ending. "What do I do now?" he pleadingly asked. "Write the IRS? Get a lawyer?

"No one ever contacted me, I can assure you that. There must be a conspiracy or a plot behind this," he said.

According to the indictment unsealed here by U.S. District Court Judge George L. Hart Jr., the Arndts allegedly filed 66 income tax returns between 1970 and 1976 claiming $270,000 in refunds, of which the IRS paid $210,000. During that time, the indictment charged that the couple used 58 fictitious names and filed the rest in their own names.

The Arndts, according to the indictment, used such names as Wener Arthur Matulla, Joseph Hans Silbert, Paul Kirk WestWood and Barry E. Hillerbrand.

Banoun said the returns were mailed to the IRS office in Philadelphia and that the refunds eventually were dispensed at the Treasury here and sent to Switzerland in a State Department diplomatic pouch.

The prosecutor charged in a status report on the investigation given to Hart that since the sealed indictment was returned in January 1978 the Arndts had claimed another $404,000 in refunds and that the government has paid $291,443 to them.

In the New Jersey case, the indictment charged that the Arndts had filed six returns claiming $28,500 in refunds and that one $3,830 refund was paid by the IRS. The indictment alleged that Arndt arranged to have a friend, identified as Harold Parker, receive mail from the IRS for Arndt in Teaneck, N.J., and then forward the mail in preaddressed envelopes to the "Trust and Investment Co." in Zurich, Switzerland. Banoun said that Parker is cooperating with the government in the investigation.

The prosecutor said that Arndt at times grew impatient when the refund checks did not arrive and called the IRS to complain about the delays.

Banoun said authorities do not know what has happened to the money or whether the United States can somehow retrieve it if it can be found. A legal spokesman for the Swiss Embassy here said that under Swiss law U.S. property could be retrieved, but only after various court proceedings.

The prosecutor said that if the Arndts are tried in a Swiss court they would face charges that they failed to report the money they allegedly received from the United States as Swiss income.