It's about a town in Europe, I think during World War II, and the
citizens find out the enemy is coming so they all leave, except they
forget about the people in the insane asylum who are suddenly free and
take on the roles of the townspeople.  When the invaders arrive, they
can't figure out why everyone acts so strangely.  I remember it was
really funny, but I was just a kid.

Dear johnsondkr-ga,

I think I've found your film; "Le roi de coeur," or King of Hearts. 
Its a bit older than you thought, produced in 1966, but enjoyed a
revival in the early 70s, perhaps fueled by the anti-war sentiment of
the era.

The movie's page at the Internet Movie Database (IMDb) is linked
below.  Through this page, you can read plot summaries, reviews, cast
and crew credits, etc.

http://www.imdb.com/title/tt0060908/

To re-live the magic, this film was released on DVD in 2001:

http://www.amazon.com/exec/obidos/tg/detail/-/B000059H9D/qid=1084684298/sr=8-3/ref=sr_8_xs_ap_i3_xgl74/103-1333354-0487858?v=glance&s=dvd&n=507846

If this answer does not meet your expectations, or if a link does not
work, please request a clarification.

Araminty-ga

Search strategy: film asylum invasion town film OR movie

also later it was a broadway play from the same story